Amid the possibly worsening banking sector crisis, fast-food icon McDonald’s (NYSE:MCD) offers a great bet. While the market remains volatile, McDonald’s brings solid financials and a credible narrative to the table. Therefore, anyone interested in staying in the equities market should give the Golden Arches a shot. I am bullish on MCD stock.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
Not the Most Exciting Investment, but It’s Reliable
Primarily, at this juncture, the optimistic thesis for the fast-food stalwart sells itself. No, it’s not the most exciting idea to add to one’s portfolio. That said, for what investors pay, they’ll receive an enterprise with strong and consistent free cash flow. As well, it’s a highly-profitable business, thus supporting the company’s dividend yield of 2.1%. Again, it’s not astounding passive income, but these attributes, in total, keep investors in the game.
Regarding the outside fundamentals, MCD stock easily benefits from the trade-down effect. Essentially, when consumers face financial challenges, they don’t just cut out all discretionary spending. Rather, they trade down to cheaper alternatives until they reach an acceptable equilibrium between cost and quality. In other words, consumers may eschew The Cheesecake Factory (NASDAQ:CAKE) in favor of McDonald’s.
Further, what benefits MCD stock is the convenience angle. Since COVID-19 capsized the world economy, several businesses, on average, don’t stay open as long as they used to. Some of that comes down to the labor shortage as people – who received stimulus checks and other forms of governmental support – felt some positions were beneath them.
However, McDonald’s was able to buck this trend, with many locations open 24 hours. During the new normal, such accessibility is tremendously attractive.
MCD Stock Rises to the Occasion
Another factor that emboldens the bullish narrative for MCD stock centers on shifting labor market dynamics. As stated earlier, amid the government supporting workers throughout the early years of the pandemic, the pressing need to find a job diminished. However, with the Federal Reserve now struggling to contain the subsequent inflationary problem, workers can’t afford to be so blasé about their income-sourcing endeavors.
Further, one must consider that layoffs in the tech space continue to accelerate this year. In some cases, companies have nearly decimated their workforce in a bid to stay alive. None of this is really surprising. With the Fed trying to scale back the liquidity excesses of the post-pandemic response, the result is fundamental deflation: fewer dollars chasing after more goods.
Now, such deflation isn’t inherently bullish for MCD stock. However, keep in mind the trade-down effect. It’s unlikely that American consumers will give up dining out altogether. What they will do is seek out cheaper alternatives. Logically, McDonald’s represents one of those alternatives.
In addition, with the mass layoffs comes a shifting of desperation from employers to employees. Note that the Fed recently raised interest rates despite the ongoing banking sector fallout. Under this framework, the economy will probably slow down.
If so, the out-of-sight, out-of-mind principle becomes relevant. Workers not showing up to the office probably risk being pink-slipped. To avoid that fate, most folks will probably work in-office. Naturally, this raises McDonald’s addressable market through increased breakfast and lunch sales.
McDonald’s Financials Foster Confidence
Undergirding the potentially bullish narrative of MCD stock sits the company’s solid financials. While they’re not astonishingly compelling, they foster confidence for jittery investors.
Let’s start with the balance sheet. While McDonald’s cash (and equivalents) of $2.58 billion compared to total debt of $48.7 billion leads to a cash-to-debt ratio of only 0.05, its Altman Z-Score (which reflects fiscal stability) pings at 4.85, indicating a low risk of bankruptcy within the next two years.
On the operational side, McDonald’s three-year revenue growth rate of 3.8% beats 73.7% of competitors in the restaurant industry. As well, its net margin stands at 26.65%, outpacing 96.56% of rivals. Combined with the aforementioned dividend yield of 2.1%, MCD stock offers a contextually attractive investment.
Plus, the operational stats might actually improve during these troubles. As a provider of (relatively) cheap comfort food, McDonald’s may offer a psychological boost.
Is MCD Stock a Buy, According to Analysts?
Turning to Wall Street, MCD stock has a Strong Buy consensus rating based on 21 Buys, five Holds, and zero Sell ratings. The average MCD stock price target is $295.85, implying 4.95% upside potential.
The Takeaway: MCD Stock Gives Investors a Chance
To summarize the relevance of MCD stock, a baseball analogy is appropriate. McDonald’s is no closing pitcher that throws 102 miles per hour. Rather, it’s a starting pitcher that can reliably throw six, perhaps seven innings while keeping the score tight. In other words, it gives investors a chance. Right now, you can’t ask for much more.
