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Case 1 - Demand For The Big Mac On The Rise

McDonald's reported increased global and US same store sales in February 2009 despite the global recession. Global sales rose 1.4% year-over-year and 5.4% excluding an extra calendar day in 2008. US sales climbed 2.8% or 6.8% excluding the extra day. Only Europe saw a decline of 0.2% but grew 4% excluding the extra day. McDonald's expanded value menu and healthier options have attracted more customers looking for cheap meals. However, currency fluctuations and rising commodity costs may pressure profits. The analyst recommends buying McDonald's stock between $50.50-52 and sets price targets of $55.50 in the short term and $62.50 in the long term

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Elizabeth Sahonlay Aguinto
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370 views1 page

Case 1 - Demand For The Big Mac On The Rise

McDonald's reported increased global and US same store sales in February 2009 despite the global recession. Global sales rose 1.4% year-over-year and 5.4% excluding an extra calendar day in 2008. US sales climbed 2.8% or 6.8% excluding the extra day. Only Europe saw a decline of 0.2% but grew 4% excluding the extra day. McDonald's expanded value menu and healthier options have attracted more customers looking for cheap meals. However, currency fluctuations and rising commodity costs may pressure profits. The analyst recommends buying McDonald's stock between $50.50-52 and sets price targets of $55.50 in the short term and $62.50 in the long term

Uploaded by

Elizabeth Sahonlay Aguinto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Demand For The Big Mac On The Rise (NYSE: MCD)

By: Sentiment Beat


March 17, 2009 02:48 PM

McDonald's (NYSE: MCD) has bucked the global recession in February as both global and U.S. same
store sales rose. The company, which operates more than 32,000 McDonald's restaurants in over 100
countries, reported February comparable sales results on Mar 9 that showed global sales rising 1.4% year
over year even as Feb 2008 included an extra day due to leap year. Excluding the extra day, sales grew
5.4%.

U.S. sales climbed 2.8%, or 6.8% if you exclude the extra calendar day in 2008. Asia/Pacific, Middle East
and Africa rose 0.7%, or 4.1% if you exclude the extra calendar day. Only Europe saw a decline, losing
0.2%, but if you exclude the extra day, even Europe increased 4%. U.S. gained on the back of the chicken
line-up, the core menu, especially the Quarter Pounder, and the popularity of its breakfasts. Europe's
growth was led by the U.K. and Russia but was partially offset by a slower Germany. Australia continued
to be strong in the Asia/Pacific region. China saw weaker sales, primarily due to the celebration of
Chinese New Year during the month when, in 2008, it was celebrated a month earlier, in January. Despite
sales growth in the first two months of the quarter, McDonald's still warned on Mar 9 that volatile foreign
currency exchange rates and commodity costs would pressure revenue and margins in the first quarter.

Foreign currencies have been especially weak in Eastern Europe, which the company said will negatively
impact first quarter results by at least 7 cents to 9 cents per share, if rates remain at current levels.
McDonald's didn't provide any actual numbers on the impact of commodity costs but said that commodity
pressures are expected to have a greater impact on results in the first half of the year.

Overall McDonald's has positioned itself well to ride out the global recession and even grow its customer
base and grow earnings. With the expanded value menu and healthier menu options now being offered,
more people these days then ever before are looking for a cheap lunch option and McDonald's offers
family's trying to spend less during the recession but still have night out an alternative to the more
expense dinner out at a local restaurant or chain restaurant like Applebee's. I suspect this will be just a
temporary trend and as the economy improves family's will revert back to there old routines and start to
frequent the local and chain restaurants more. However McDonald's will retain many of these new
customers who will continue to come back for a quick meal at a value.

The stock is trading with a forward P/E of about12.50. MCD can be played as a long term and short buy.
Today MCD is trading at $51.50, the current trading range it is stuck in for March is $50.50-54. It is an
attractive buy between $50.50-52. I would set $55.50 as a short term(1-3 months) trading target this is a
61.8% move from the recent March low of $50.44 to the March high of $59.25, and is also a 50%
retracement from the March low to the January high of $63.87. I would set a trailing stop of 4-5% once
$55.50 is hit. And I would use $62.50 as long term (6 months +) trading target. Once that level is hit I
would implement a trailing stop at $58.75

Questions:

1. Illustrate and explain the changing demand for Big Mac using the indifference curve and budget
line.
2. In this case study, what do you think are the factors affecting the increased demand for Big
Mac? What about the competitor food chains? How do you think they are affected by this
increased sales for McDonalds?
3. Do you consider the demand for Big Mac elastic or inelastic? Explain.

Case taken for www.istockanalyst.com and questions from Introductory Microeconomics by Pagoso et.al.

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