On September 11, an Investing Club member asked whether McDonald’s Corporation (NYSE:MCD) was a buy, sell, or hold after the stock fell nearly 20% over the previous 12 months, noting that higher beef prices were a factor. Mad Money host Jim Cramer stated:
Okay, I want you to buy it here. Let me tell you why. I think McDonald’s has plans. They are very cagey, but they are trying to reinvent the place. And I think that you’re getting it at an exceedingly low level. I wouldn’t recommend it if it were still at the $300 level because that’s too risky. But where it is now, I’m with you.
I think that they can do it. By the way, the other guys are not as well capitalized as McDonald’s, but I’m going to give you a little heads-up here. You might not want to hear it, but I’m going to give it to you. Jersey Mike’s is better… Spent some time with Charlie Morrison, CEO, the other day, also before when it came public. I think it’s got a lot less risk, and they can put up thousands of them, and it’s got terrific management. I like McDonald’s, but I want you to consider this Jersey Mike’s, too.
McDonald’s and Jersey Mike’s Show Different Growth Profiles
McDonald’s Corporation global comparable sales increased 1.3% in the second quarter, while U.S. comparable sales rose 0.8%, down from 2.5% a year earlier. The company said U.S. comparable sales benefited from higher checks and favorable product mix but were partly offset by negative comparable guest counts. Non-GAAP diluted EPS rose 6% to $3.38. CEO Chris Kempczinski said McDonald’s sees “an opportunity to raise the bar in the U.S. and accelerate performance in our largest market.”
On the other hand, Jersey Mike’s Subs Inc. (NYSE:JMKE) reported 10% growth in second-quarter systemwide sales to $1.21 billion, 2.3% same-store sales growth and 8.1% net unit growth. It opened 83 stores during the quarter and ended June with 3,378 locations. CEO Charlie Morrison said the same-store sales results showed “strong progress” toward the company’s long-term $2 million average unit-volume objective and that the acceleration had continued into the third quarter.
Risks Are Different for MCD and JMKE
McDonald’s Corporation’s risk is that its U.S. recovery remains slow. The 0.8% comparable-sales increase was supported by higher checks even as guest counts declined, leaving management focused on improving performance in its largest market. Meanwhile, Jersey Mike’s Subs Inc. has stronger unit growth but carries substantial debt. The company reported $2.096 billion of total debt at June 28, while its filing showed $2.141 billion of principal outstanding under its securitization facility and a leverage ratio above 5 times at quarter-end. However, Jersey Mike’s subsequently used approximately $301 million of IPO proceeds to repay securitization debt on August 17. Net income fell 37% to $37 million in the second quarter.
Hedge Funds and Short Interest
Insider Monkey, which tracks more than 1,000 hedge funds, counted 79 hedge fund holders of MCD in the second quarter, down from 83 in the first quarter. JMKE does not have a comparable Q2 hedge-fund record because its IPO took place in July, after the quarter ended. MCD short interest was at roughly 1.5% to 1.8% of the float.
Cramer’s comparison presents investors with different risk profiles: McDonald’s Corporation is a bet on a U.S. turnaround at an established global restaurant company, while Jersey Mike’s Subs Inc. offers faster unit expansion but comes with substantial debt and the execution risks of a newly public company.
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