McDonald's (MCD) is having a rough year. Its second-quarter earnings report, just the like its first-quarter release, showed the world's largest fast-food chain rattled by the headwinds of lower customer spending and higher costs. Adding to the grim 2024 outlook for MCD, management said that the pain is set to continue, with same-store sales expected to be down for the next few quarters.
Against a backdrop of margin-crunching promotions and cash-strapped customers, the Golden Arches are staring down some dark times. However, it's hard to tell by looking at the share price, which would seem to suggest that investors are just “lovin' it” as McDonald's warns of ongoing weakness. Since its Q2 results came out ahead of the opening bell on July 29, MCD stock has gained 5% on the week so far.
So, what's behind this divergence in the fundamentals and the stock price for this passive income pick - and is now a good time to buy MCD? Let's have a closer look.
About McDonald's Stock
Founded in 1940 by the brother duo of Maurice "Mac" and Richard "Dick" McDonald, McDonald's (MCD) is the world's largest fast-food restaurant chain by revenue. Popular for its lip-smacking variety of burgers, fries, chicken McNuggets, breakfast items, and soft drinks, the company primarily operates through a franchise model, with most restaurants owned and operated by independent franchisees. The company currently commands a market cap of $192 billion.
Despite its post-earnings show of strength, MCD stock is still down 10.5% on a YTD basis.
The stock offers a dividend yield of 2.51%, paid quarterly to shareholders. Notably, MCD has been raising dividends consistently for the past 47 years - which means it's a Dividend Aristocrat, and on pace to earn Dividend King status.
With a payout ratio around 55%, these dividends are well-covered by MCD's earnings.
Inside MCD's Latest Results
The stock's bounce aside, relatively weaker results in Q2 have raised alarms in certain quarters about McDonald's prospects. While consolidated revenues remained almost flat from the previous year at $6.5 billion, EPS slid by 6.3% over the same period to $2.97, missing the consensus estimate of $3.08. This was the company's second consecutive quarterly EPS miss, and global comparable sales decreased by 1% from the previous year.
However, zoom out and the picture becomes less dire. Over the past five years, McDonald's revenues and EPS have grown at CAGRs of 4.2% and 7.1%, respectively. Impressively, this period also includes the period of the COVID pandemic and accompanying restrictions, which was devastating for the restaurant industry.
Returning to Q2, the company increased its count of systemwide restaurants both in the U.S. and internationally. US systemwide restaurants count increased by 39 from the prior year to 13,484, while on the international front, 196 restaurants were added to bring the total figure to 10,333, reflecting continued expansion efforts on the part of the company and confidence on management's part in a stronger underlying demand trend.
Looking ahead, analysts are expecting the company to report sector-beating revenue and EPS growth. Forward revenue growth for the company is projected at 6.18%, compared to the sector median of 3.63%, while forward EPS growth is pegged at 16.08%, compared to the 6.24% sector median.
What's Behind the Post-Earnings Bounce in MCD?
MCD wasn't particularly oversold heading into the earnings report, but the stock was hovering near its 52-week lows around $243 - which may have been a natural place for the stock to find buyers, especially with this region marking a roughly 20% drop from the January all-time highs.
Another possible contributor to the recent move higher in MCD stock could be the expected September rate cut by the Federal Reserve. Lower rates are expected to bode well for cyclical stocks in generally, and ongoing indications of a cooler inflationary environment should be good news for its core customer base.
McDonald's Business Model
McDonald's success hinges on a clever business model that keeps its assets light. They only directly operate a small portion (5%) of their restaurants, while the remaining 95% are owned and run by independent franchisees.
This approach generates revenue in several ways. Franchisees pay a royalty fee (percentage of sales) to McDonald's, with a slightly higher rate for new restaurants opened in 2024 or later (5% vs 4% for existing). Notably, this hike in franchise fees was after almost three decades of the 4% fee, and is expected to boost the company's margins.
Additionally, McDonald's may earn rent from franchisees who lease property from the company, or they might even co-own the location through equity investment. These franchise agreements typically last for 20 years, with the option for renewal or transitioning ownership to a new franchisee after the term ends.
By keeping their asset ownership low, McDonald's can focus resources on brand development, menu innovation, and supporting their vast network of franchisees. Last year, McDonald's raked in rent payments from its franchisees totaling $9.84 billion.
Strategic Moves at MCD
To keep its business growing, McDonald's announced an expansion plan in December 2023, targeting 50,000 restaurants by 2027 (8,000-plus restaurants compared to now).
McDonald's is also a huge player in the coffee business, selling nearly 8 million cups of coffee per day - making it the second-largest player in the category, behind only Starbucks (SBUX). To ramp up competition, it's leaning on its new CosMC concept to see if it can challenge Starbucks' leadership in caffeinated beverages.
Further, to continue serving value-for-buck offerings to its patrons, the company has launched a $5 meal deal, likely with a potential permanent value platform later in 2024.
Analysts Rate MCD a Buy
Analysts rate MCD stock a “Moderate Buy” overall, with a mean target price of $305.38. This denotes an upside potential of roughly 15% from current levels.
Out of 31 analysts covering the stock, 17 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 12 have a “Hold” rating.
