Could McDonald’s be on the wane?

After a long history of dominance, McDonald’s has started to show signs of weakness. Despite recent strength in its shares, a move lower seems highly likely in the near future.

McDonald’s logo
Source: Bloomberg

With McDonald's due to report its latest earnings figures on Thursday 22 October, questions remain over strategy in the face of increasing competition and changing consumer habits.

Much has been made of the rise in alternatives over recent years, with fast food transforming with the rise of firms such as Chipotle and Five Guys. These two firms provide evidence of the types of threats that are arising in recent years. The rise of Chipotle proves that the tastes of some customers are moving away from traditional burgers and fries in favour of not only healthier but more varied alternatives.

On the other hand, Five Guys is perceived as a better quality product than McDonald’s. This brings into question the question of whether the firm will only be suited to less demanding customers. This trend of falling customer numbers is evident when looking at sales, which are expected to decline both in Q3 and yet again in Q4.

As demand for the company’s high quality/high margin products fall, so does the profitability of the firm. This year represents the first time in more than 40 years that McDonald’s will close more restaurants than it opens and this is a clear signal that the firm is going through testing times. Despite the initial furor surrounding the decision to introduce 24-hour breakfasts, the fact is this is a perfect example of the lacking innovation that has led recent demise.

From a technical analysis standpoint, the shares are at a very important position. The price is trading just below the major resistance level of $105.26 and an ascending trend line dating back to early 2012. Price is trending outside of the Bollinger band for the third consecutive week and with the MACD histogram (17 months) and stochastic oscillator (30 months) at historically high levels, it seems likely that price normalises soon with a move lower.

We have not yet seen any signal to say this chart is about to turn and thus I would want to see a move back below $101.66 to gain confidence of a selloff towards the $100, $95 and $90 areas. Only if price closes above the ascending trendline (currently $106.80) would I believe we are going to see much of an upside move from here.

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