Will McDonald's (MCD) Stock be Hurt by Possible Moody's Credit Rating Downgrade?

NEW YORK (TheStreet) -- Shares of McDonald's (MCD) were falling 0.2% to $95.92 on Tuesday as Moody's Investors Service put the fast food company's A2 credit rating on review for a possible downgrade.

Moody's said the review for downgrade was prompted by McDonald's announcement that it will accelerate its 3-year shareholder target and return $8 billion to $9 billion to shareholders in 2015 through dividends and buybacks.

"Overall, Moody's views this accelerated share repurchase and guidance to the high end of the payout range during a period of continuing operating weakness as McDonald's adopting a more aggressive financial policy towards shareholders that will result in significantly higher debt levels, weaker credit metrics and limit its financial flexibility," Moody's Senior Credit Officer Bill Fahy said.

Moody's added that McDonald's ability to strengthen its credit metrics could be difficult if the company's turnaround plans and restructuring don't reach its expectations.

TheStreet Ratings team rates MCDONALD'S CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Among the primary strengths of the company is its expanding profit margins over time. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • 36.94% is the gross profit margin for MCDONALD'S CORP which we consider to be strong. Regardless of MCD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, MCD's net profit margin of 13.61% compares favorably to the industry average.
  • MCD, with its decline in revenue, slightly underperformed the industry average of 7.0%. Since the same quarter one year prior, revenues fell by 11.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • In its most recent trading session, MCD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
  • MCDONALD'S CORP's earnings per share declined by 30.6% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, MCDONALD'S CORP reported lower earnings of $4.83 versus $5.56 in the prior year. For the next year, the market is expecting a contraction of 0.9% in earnings ($4.79 versus $4.83).
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Hotels, Restaurants & Leisure industry average. The net income has significantly decreased by 32.6% when compared to the same quarter one year ago, falling from $1,204.80 million to $811.50 million.
  • You can view the full analysis from the report here: MCD Ratings Report
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