McDonald’s, one of the most recognizable food companies in the food service industry, has seen its earnings dip and stagnate over the past two years. 2014 saw the company post its first yearly decline in global sales following a solid decade with U.S. stores posting declining revenues for the past six quarters. While the company is still a global leader in its industry, some investors have become concerned over these losses, as well as the company’s seeming lack of awareness of growing industry trends. Moreover, inflation and shifts in foreign exchange have caused tremendous short-term losses and squeezed margins further.

The Fundamental Picture

Confidence in McDonald’s (MCD:NYSE) shares has recently hit lows over recent flagging performance and sluggish growth. Company shares have lost 3% of their value over the last 12-months with the company underperforming comparable peers. Revenue fell by 10% versus the previous quarter, while Burger King Worldwide (BKW:NYSE), by comparison, reported 9.3% growth in revenue. While much of the loss came from gains in the dollar, this seems to be a trend as well, with the company experiencing shrinking revenues for the past year as same store sales dipped globally. This worsened even further during the first quarter of 2015, when the company posted even sharper losses with earnings per share tumbling 23% year over year.

From a financial standpoint, aside from weaker revenues, McDonald’s is experiencing a constant rise in overall debt, with the debt to equity ratio widening by 25% from 2013 to 2014 alone. In their first quarter earnings report of 2015, the company reported earnings per share of $1.01 disappointing forecasters who predicted a number closer to $1.06. This is to be expected, with the company reporting a 2.3% drop in same-store sales globally, and 2.6% in the US. The report also revealed a decline in operating income across all their markets (US, APMEA, and Europe). Although McDonalds still boasts a dividend with a solid 3.5% annualized yield, investors looking for upside in shares should be wary.

Analysts have been more optimistic in their analysis of McDonald’s future earnings, forecasting a steady growth in EPS, however the main contributor is likely be buybacks, not EPS and revenue growth. To put share repurchases in perspective, the company plans to distribute $6 billion to shareholders annually via dividends and buybacks. Between the end of 2009 and end of 2014, the number of shares outstanding declined by a whopping 10.7%. While shorting the shares might seem like an attractive option considering the shrinking margins on products and waning revenues, investors should be cautious considering the nature of buybacks. Nevertheless, upside will also likely be capped considering the slide in fundamentals. While consensus forecasts can sometimes vary, it’s interesting to note that to date, McDonald’s has outperformed their forecast in each of the previous four quarters

There is increasing interest and curiosity in the company over a recently initiated turnaround effort, spearheaded by new CEO Steve Easterbrook. This effort includes improving the quality of McDonald’s food items, as well as attempts to modernize the consumer experience, and creating new promotions to create a new, fresher look. These front-end fixes are aimed at drawing in more consumers, as well as attempting to inspire confidence in the company’s product. The back-end of this turnaround includes restructuring the company’s operating segments, as well as cutting costs. However, efforts to rebrand have been perceived as shallow, missing the larger picture of how their product is perceived by younger markets.

The Technical Take:
From a technical perspective, the case for a continued trend sideways is strong considering the deteriorating underlying financials while shares prices have been supported from buybacks. Short interest from sophisticated investors like hedge funds has climbed, but short-sellers should be cautious considering the emphasis on providing shareholder value through dividends and other forms of returning cash. On a 5-year basis, the shares have been consolidating between an uptrend line and horizontal resistance which has formed the basis for an ascending triangle pattern. However, shorter term, the risks are acutely to the downside. Looking at the four hour chart, two curious patterns start to appear. The first setup is a channel pattern followed by a double top pattern seen at recent highs.  

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The 4-hour candle chart shows clearly the upward trend channel setup with share prices trending right towards the bottom of the channel. Support from dividends and buybacks could make the lower channel line a great entry point on the long side for investors seeking income. Rt also leaves the door open for a potential breakout to the downside should short-interest increase. Any move through the lower channel line or support at $94.93 opens the door to $93.50 and then $91.37 on the downside. The closing range could be indicative of a coming directional breakout. On the upside, the shares are bound by the present double top at resistance of $101.80. A break above the resistance line could pave the way towards a move to the subsequent level of $103.78. However, based on the confluence of current technicals and fundamentals, the outlook is more biased to the downside.

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Conclusion
Share prices have managed to rebound from the last earnings debacle as McDonalds supports share valuations through a combination of dividends and buybacks. The short-to-medium outlook is a little cloudier considering the foreign exchange losses will likely persist from the appreciation in the dollar. Unless the company can dramatically reinvent its image to maintain its relevance in a changing global foodservice paradigm, its fortunes and years of recognition may begin to fade. In the near-term though, the narrative remains sideways, with the ideal strategy focusing on playing the range instead of looking for directional momentum in the shares.