Reference no: EM132365577

Demand For The Big Mac On The Rise (NYSE: MCD)

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 rust 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 about 12.50. 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 tenm(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.