Earnings Rundown

As McDonald's falls behind on fake meat, fad chicken, its stock slips for first time in two years

McDonald's will win the delivery battle despite losing the chicken wars
McDonald's will win the delivery battle despite losing the chicken wars
Key Points
  • McDonald's faced high Wall Street expectations into earnings, and its stock fell by 5% after its first miss in two years.
  • The Big Mac maker lost some fast-food menu ground to Restaurant Brands after Burger King beat it to fake meat and Popeyes beat it with its breakthrough chicken sandwich.
  • But in an era of restaurant consolidation and scale critical to digital investment, McDonald's has long-term advantages.

McDonald's lost a few recent fast food skirmishes. Restaurant Brands' Burger King beat it to fake meat and the Popeyes chain it acquired in 2017 launched a breakout chicken sandwich that has set a new standard for fried poultry on a bun.

McDonald's stock tanked by 5% on Tuesday after the first earnings miss in two years, and with investors wanting more. But if the Big Mac is under attack, the fast food giant will deliver, according to Nicole Miller Regan, managing director and senior research analyst at Piper Jaffray.

McDonald's came up short on both the top and bottom line, but the temporary softness in growth can be overcome, and a decline in margins reflects its heavy recent investment in digital in an era when global scale will be critical and consolidation in the restaurant space is accelerating, according to Miller Regan.

The Piper Jaffray analyst remains bullish on McDonald's and provided four reasons investors should look past the post-earnings selloff. To start, the fast-food segment overall is doing very well.

1. The burger segment is strong

McDonald's had no answer to the Popeyes chicken sandwich, and Miller Regan noted that with Wendy's citing spicy nuggets as a recent strength, it is clear the consumer demand for chicken and the chicken segment is cutting into burger sales, but the damage is limited.

"From a very high level, what we can understand from McDonald's results is that the limited service segment is indeed doing much better than the casual dining segment, that the burger segment is still strong," Miller Regan said.

"What's most surprising about the McDonald's numbers, and what we expect for the rest of the earnings season, is how strong the limited service burger category is doing," she said. "What's most fascinating to me is the strength of the category overall."

Restaurant Brands International stock has gained 31% so far in 2019, more than doubling McDonald's return.

McDonald's U.S. same-store sales grew by 4.8% during the quarter, falling short of Wall Street's estimate of 5.2%.

"It's still negative. As I mentioned, it's still our largest opportunity, but not a meaningful change in trend in the third quarter versus second quarter," McDonald's CFO Kevin Ozan told analysts on the conference call.

The Piper Jaffray analyst said sales had done significantly better over the past two years and so it is not a surprise the stock came under pressure, but even at 4.8%, "that's thousands of more Big Macs that are sold. ... It's a massive, massive billions of dollars that came in the door. ... If you look at where the expectation was, maybe it wasn't just enough," she said.

2. Digital investment will pay off longer-term

Promotions on McDonald's menu items did not spur sales growth enough in the most recent quarter, but the Piper Jaffray analyst thinks technology upgrades will allow McDonald's to "up its game."

A Big Mac is displayed on a page of the McDonald's app
Daniel Acker | Bloomberg | Getty Images

"We've already learned that from the digital, or delivery transformation that they've had abroad, and now they're just bringing it to the U.S.," Miller Regan said. "They'll actually be luring customers in the best that they can directly to the McDonald's app. That will be really important for them, because even if they just get those most loyal users or probably the value-seeking individuals, there's a lot of information that will they will capture in that transaction and that will inform them of how to proceed going forward."

3. Not too far behind on fake meat

"We should give a lot of credit to Burger King for being the first legacy chain to offer plant-based proteins at scale," Miller Regan said. "Customers are looking for this option and it's a new customer. We don't know how long that will last, but any new guest, any more frequent guest is a profitable guest."

But she does not feel that McDonald's has fallen too far behind. "It's so new anyway that I don't feel like they're far behind. ... they might be a couple quarters behind. ... McDonald's will do it, thoughtfully and carefully.""

4. Consolidation plays to McDonald's strengths

Miller Regan said scale will be a greater advantage for restaurant companies and restaurant stocks in the future.

"We're gonna go back into a period of restaurants as conglomerates," she said. "Think about all the acquisitions that have been done. More than 30% of the restaurant industry has been taken private in the last 18 to 24 months. ... It just shows you that that's exactly what has to be done to win. And McDonald's already has that with the global footprint that they have today."