McDonald’s (NYSE:MCD) showed signs of a slowdown in its Q1 results, leading to shares sliding lower in recent weeks. While the company entered FY2024 with a softer growth trajectory compared to last year, I don’t believe this necessarily sets a new trend. With this year’s numbers facing tough comps from FY2023, a breather in McDonald’s growth is to be expected. In the meantime, a rebound is likely to occur from FY2025 onwards, suggesting that the recent stock dip offers a buying opportunity. Thus, I am bullish on MCD stock.
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First-Quarter Results Face Tough Comps
The most important factor to recognize when looking at this year’s first-quarter results is that McDonald’s faces tough comps from FY2023. Last year’s promotions, smart pricing strategies against inflation, and very soft comps from FY2022 resulted in strong revenue growth. This year, the company will likely take a breather as it consolidates last year’s revenues and earnings. This doesn’t mean, however, that no growth will occur this year. In fact, FY2024 is expected to be another year of record revenues and earnings.
Taking a deeper look at McDonald’s first-quarter numbers, the most disappointing figure at first glance appears to be the rather lackluster same-store sales growth. It came in at just 1.9%, leading to total sales growth of just 4%. These are notably weaker numbers compared to the high-single-digit same-store and total sales growth figures we were used to seeing last year.
Nevertheless, McDonald’s performance was quite strong in the right context. Q1 celebrated McDonald’s 13th consecutive quarter of positive comparable sales growth, including 30% growth over the last four years.
In other words, McDonald’s sustained outstanding growth momentum during the past four years—some of the best years in its history. The fact that the company has not seen a temporary pullback but instead consolidates its current revenue levels is quite outstanding, in my view. Evidently, demand for its burgers and fries remains at all-time-high levels, defying saturation despite its, let’s say, impulsive expansion in recent years.
Record Financials in FY2024, Growth to Rebound in FY2025
Besides the fact that McDonald’s first-quarter growth was strong in the right context, another factor that investors seem to have been ignoring these past few weeks is that the company is still set to deliver record financials in FY2024. Even more importantly, a rebound in growth is also expected to take place in FY2025.
In particular, the company ended the quarter with 42,018 restaurants, 3.7% more than in the same period last year. Its location count continues to expand, which, along with low-single-digit same-store growth, will likely result in meaningful total revenue growth for the year. Consensus revenue estimates point to a record $26.65 billion, translating to year-over-year growth of 4.5%. When it comes to earnings per share, the market expects softer year-over-year growth of 2.2%, yet this still implies a record figure of $12.20.
In the meantime, Wall Street expects a rebound in revenue and earnings growth in the medium term to the mid-to-high single digits, mirroring last year’s rebound over the equivalent slowdown that occurred in FY2022.
The Valuation Signals a Potential Buying Opportunity
Investors often complain that they hesitate to buy McDonald’s stock because it continuously trades at a premium. Well, the stock’s recent dip seems to have opened up a buying opportunity, as shares are likely undervalued against the company’s future growth estimates and McDonald’s overall qualities.
At 22.4x this year’s expected earnings-per-share and 20.6x next year’s figure, the stock appears to be trading at the low end of its five-year range of 20-30x.
One argument against this point is that interest rates remain high, hampering the stock’s investment case. However, seeing that most quality companies have retained rich multiples in this environment, I don’t see McDonald’s valuation getting notably compressed from its current levels.
Is MCD Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, McDonald’s features a Moderate Buy consensus rating. This is based on 19 Buy and nine Hold ratings assigned in the past three months. At $306.17, the average MCD stock forecast suggests 12.85% upside potential.
If you’re unsure which analyst you should follow if you want to buy and sell MCD stock, the most accurate analyst covering the stock (on a one-year timeframe) is David Palmer from Evercore ISI, with an average return of 15.03% per rating and an 86% success rate. Click on the image below to learn more.
The Takeaway
To sum up, McDonald’s sales growth slowdown in its Q1 results, though concerning at first glance, is better understood within the context of tough comps from last year. While same-store sales growth may have dipped, the fact that the company sustains its abruptly higher sales levels and even keeps growing past them is a testament to the quality of its business model.
In fact, with financials set to hit new records in FY2024 and a projected rebound in growth for FY2025, the recent stock dip likely signals a buying opportunity.
