MCD, YUM: Fast-Food Slump Could be a Buying Opportunity

Fast-food firms like McDonald’s (NYSE:MCD) and Yum! Brands (NYSE:YUM) have been under some pressure lately. Though leading fast-food brands have some impressive pricing power, it’s probably safe to say that some chains have vastly overestimated their pricing power. When it comes to McDonald’s, or Yum-owned Kentucky Fried Chicken (KFC), Taco Bell, and Pizza Hut, consumers have come to expect cheap eats. Come summer, McDonald’s and Yum! are poised to deliver more on the value front, which could bring back consumers and share price momentum.

Apart from the delicious taste, secret sauces, and family recipes (the colonel’s spice blend is still virtually unmatched, in my opinion), a major reason why people choose to go to a fast-food chain is affordability and convenience. All things considered, I’m bullish on MCD and YUM stock and view the recent stagnation as more of a golden buying opportunity.

McDonald’s: Golden Buying Opportunity in the Golden Arches

McDonald’s is arguably one of the most efficiently-run restaurant chains in the industry. And it’s getting even more efficient as it uses technology (think improved tracking for deliveries made within the loyalty app) while also testing new “real estate-light” store concepts like CosMc’s and takeout-focused restaurants.

With its fast-moving double-lane drive-thrus at some modernized locations and other tech-driven optimizations at the store level, McDonald’s may be leaving rivals behind. These advancements are helping to remove friction from ordering.

Such distinct advantages, I believe, make MCD stock worth buying on the dip, even as temporary inflation-era headwinds nibble away at comparable sales growth, which slowed to 1.9% in Q1 2024, down from 3.4% a quarter prior.

Further, with the massive number of restaurants that draw massive crowds in, many of whom come for the meal deals but stick around for the dessert and McCafé drinks, it’s tough to get more convenient than driving through the local McDonald’s or ordering in some McDelivery. Despite the convenience factor, however, consumers have shown they may not be as willing to tolerate price increases as the firm may have initially thought. At least, that’s what the latest quarter is telling us.

After witnessing the quarter be weighed down by many belt-tightening customers, I’m inclined to believe value may be as big of a deal as convenience. With a limited-time $5.00 meal deal planned for the summer, it seems like McDonald’s is firing the first shots that mark the start of fast-food deflation.

Did some fast-food firms raise prices too high, too fast, just like McDonald’s did in the past year? It definitely seems that way. Now, we could see value hop into the driver’s seat for the summertime as firms look to pull back on pricing.

It’s a good time to be a fast-food fan. But only time will tell if summertime value menus save the slumping fast-food stocks. My guess is such deep-value promos will get crowds coming back, but whether they’ll stay once the deals are gone is another question entirely. There’s always a chance they’ll have more of an opportunity to grow accustomed to today’s higher prices. That is, of course, if deflation isn’t on the menu for 2025 and beyond.

At 22.7 times trailing price-to-earnings (P/E), which is around 30% lower than the 31.2 times P/E multiple it commanded during its June 2023 quarter, the stock’s current multiple looks just as tempting as its new value menu. The 2.5% dividend yield is also a nice addition.

What Is the Price Target for MCD Stock?

MCD stock is a Moderate Buy, according to analysts, with 19 Buys and 10 Holds assigned in the past three months. The average MCD stock price target of $304.21 implies 17.7% upside potential.

Yum! Brands: Menu Innovation and Value

Recently, Yum Brands’ KFC also jumped aboard the sizzling summertime discounting bandwagon with its “Taste of KFC Deals” value menu. The menu offers options starting at $4.99 for two pieces of chicken, gravy-drenched mashed potatoes, and a biscuit. Wendy’s (NYSE:WEN) also announced its $3.00 breakfast bundle, a seemingly direct response to McDonald’s latest value offering.

Indeed, it seems that value is the name of the game for fast-food firms as they seek to gain an upper hand on one another while attempting to attract budget-conscious customers.

Unlike MCD stock, which is in correction territory, YUM stock is about 3% away from new highs. Despite a soft recent quarter, Yum! Brands may benefit from a combination of menu innovation and value menus to drive growth.

The latest quarter saw falling sales in some segments, with U.S. KFC sales slumping by 2%, with most weakness coming from the U.S. market (comparable sales fell 8%). Undoubtedly, Americans have felt the inflationary pinch, but don’t count on them to be gone for very long—not with the new value menu deal in place.

Of all the fast-food chains, Yum! deserves top marks for menu innovation. KFC’s Double Down sandwich is a great contender in the chicken sandwich wars. At Pizza Hut, Melts may be enough to draw in hungry customers.

In any case, YUM stock looks way too cheap at 24.7 times trailing price-to-earnings, well below the 32.5 times multiple it commanded during its June 2023 quarter. Inflation headwinds won’t last forever — not once menu innovation and value menus begin to impact coming quarters.

What Is the Price Target for YUM Stock?

YUM stock is a Moderate Buy, according to analysts, with eight Buys and 10 Holds assigned in the past three months. The average YUM stock price target of $146.13 implies 6.2% upside potential.

Conclusion

Fast-food chains won’t stay stagnant forever. Value menus could bring back crowds for summer, but McDonald’s and Yum! will need to do more to keep them sticking around. Perhaps menu innovation and more caution on future price increases will be key to not scaring consumers off again. Overall, analysts are bullish on both stocks, but between the two, they expect more upside from MCD stock.

Disclosure