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McDonald’s: Could Golden Arches Provide Golden Returns?
Stock Analysis & Ideas

McDonald’s: Could Golden Arches Provide Golden Returns?

I am neutral on McDonald’s (MCD) as the company’s strong growth momentum and competitive strengths are offset by its slightly above average valuation multiples.

McDonald’s is an American fast-food company that was first started as a restaurant and a hamburger stand in 1940 in San Bernardino, California. Its world-famous Golden Arches was introduced in 1953. The company was acquired by Ray Kroc in 1955. (See Analysts’ Top Stocks on TipRanks)

Strengths

McDonald’s is the world’s biggest restaurant chain by revenue and serves over 69 million customers across 100 countries in the world on a daily basis. Aside from hamburgers, McDonald’s also sells cheeseburgers, French fries, chicken items, breakfast, wraps, sundaes, shakes, and desserts. The company has also been responsive to customers’ changing tastes and dietary preferences and added fish, salad, fruit, and smoothies to its menu over the years.

The company has over 200,000 employees and is ranked ninth on the brand valuation list as of 2020.

Recent Results

McDonald’s beat Wall Street’s forecast for its third quarter of 2021 on revenue and earnings.

The company reported revenue of $6.2 billion as compared to analysts’ estimates of $6.04 billion. Its earnings per share stood at an adjusted $2.76 per share as compared to the $2.46 expected EPS. The company also has a net income of $2.15 billion as compared to $1.76 billion a year earlier.

Global same-store sales increased to 12.7% from the previous year and 10.2% from two years ago. In the home market, same-stores sales saw an increase of 9.6% from the previous year when the fast food industry started recovering from the COVID-19 pandemic. The company attributed its strong performance to its new chicken sandwich, its Saweetie meal promotion, and other new menu items and marketing promotions.

The company launched its U.S. loyalty program in July which has resulted in an enrollment of more than 21 million members, with 15 million active users. However, McDonald’s also encountered some roadblocks along the way, including staff shortages and speed of service.

McDonald’s internationally operated markets saw its same-store sales increase 13.9% from the previous year, attributed to strong demand in the U.K. The segment also saw improved same-store sales in Canada, Germany, and France; however, Australia’s same-store performance was slowed by another round of lockdowns.

For the fourth quarter of 2021, McDonald’s is expecting system-wide growth in sales in the high teens in customer segments, if currencies remain stable. The company predicted growth in the mid-to-high teens in its previous forecast. The chain is also expecting full-year commodity costs to rise 3.5% to 4%.

McDonald’s has also announced that it is entering into a strategic partnership with IBM (IBM) to automate its drive-thru operations.

Valuation Metrics

McDonald’s stock looks reasonably valued right now. Its EV/EBITDA ratio of 18.9x is slightly above its five-year average of 17.1x and its P/E ratio of 26x is also slightly above its five-year average of 24.4x.

Moving forward, the company expects to continue generating solid growth, with EBITDA expected to grow by 37.9% in 2021 and 5.6% in 2022.

Normalized earnings per share are also expected to grow by 55.7% in 2021 and 7.7% in 2022.

Wall Street’s Take

From Wall Street analysts, McDonald’s earns a Strong Buy analyst consensus based on 19 Buy ratings, four Hold ratings, and zero Sell ratings in the past three months. The average McDonald’s price target of $273.18 puts the upside potential at 4.4%.

Summary and Conclusions

McDonald’s is arguably the greatest fast-food chain in the world as it enjoys immense brand power and has a large and loyal customer base. It also owns some of the best real estate locations in the world, giving its individual restaurants additional competitive positioning.

On top of that, Wall Street is bullish on shares here and the growth potential remains strong. That said, shares are trading at a slight premium to historic multiple averages.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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