While no one would confuse fast-food icon McDonald’s (NYSE:MCD) with a flailing enterprise, it’s not the most enticing investment based on market share trends. However, the symbol of American-style capitalism arguably offers an upside opportunity that is hiding in plain sight. Despite obvious competition concerns, I am bullish on MCD stock.
MCD Stock Suffers from Fading Market Share
At first glance, MCD stock doesn’t seem that troubled. Since the beginning of the year, shares gained about 7%. Combined with McDonald’s dividend yield of 2.11%, the Golden Arches offers a solid but unremarkable idea. However, shares have also faded conspicuously in the past month, leading to inquiries. One major problem is that the fast-food giant is losing market share.
Specifically, the U.S. Census Bureau provides revenue data for the retail food services and drinking places sector. During the fourth quarter of 2020, McDonald’s revenue clocked in at $5.31 billion, representing 9.37% of the total retail food/beverage services market, which posted total revenue of $56.7 billion. At the same time, rival Starbucks (NASDAQ:SBUX) posted sales of $6.75 billion, capturing an 11.91% market share.
As the acute euphoria of retail revenge faded, Starbucks’ market share trended at a little over 10% between Q1 2022 through Q2 2023. This level is roughly in line with trends seen prior to the COVID-19 pandemic.
On the other hand, McDonald’s average market share fell to 7.1% during the aforementioned period. However, in the six quarters ended Q4 2019, the Golden Arches’ market share stood at an average of 8.43%. Therefore, MCD stock is losing ground to Starbucks and possibly other rivals, posing serious concerns for the fast-food giant.
Recent Q2 Print Dispels Some Concerns
Nevertheless, investors shouldn’t hit the panic button just yet on MCD stock. As the company’s most recent Q2 earnings print shows, the old dog is still capable of learning new tricks.
According to TipRanks reporter Kailas Salunkhe, McDonald’s posted revenue of $6.5 billion, which represented a 13.6% year-over-year lift. More importantly, this tally beat Wall Street’s consensus estimate by $210 million. In addition, the company delivered earnings per share of $3.17, which also beat expectations (by 39 cents).
Impressively, McDonald’s “global comparable sales rose 11.7% with double-digit comparable gains across all segments,” according to Salunkhe.
Further, Salunkhe noted that “while systemwide sales surged by 14%, the company’s consolidated operating income shot up by a massive 81% during the quarter. Importantly, U.S. comparable sales tracked 10.3% higher on the back of menu price increases and higher footfalls.”
It’s also worth mentioning that during Q2, McDonald’s market share of the retail food/beverages sector landed at 7.3%, rising from Q1’s 6.7%. Obviously, management isn’t giving up the fight, and fundamental factors suggest that investor enthusiasm for MCD stock is justified.
Trade-Down Effect Benefits McDonald’s
To understand the upside narrative of MCD stock, one must consider the trade-down effect. In a nutshell, consumers faced with financial pressures don’t immediately go cold turkey on their spending. Rather, they trade down their purchases until finding an acceptable price-to-quality equilibrium.
Fundamentally, more than enough evidence indicates that households are hurting. At the top level, the Federal Reserve admitted that the inflation battle is far from over. Further, consumers are delaying purchases of expensive items. By logical deduction, workers – especially those recalled back to the office – will likely opt for more affordable caffeine choices.
Rather than buy pricey coffee products at Starbucks, consumers may elect to go to McDonald’s. As economic pressures continue to build, replacing Starbucks with McDonald’s would be one of the easier choices to make. Therefore, investors may want to play the long game with MCD stock.
Is McDonald’s Stock a Buy, According to Analysts?
Turning to Wall Street, MCD stock has a Strong Buy consensus rating based on 20 Buys, six Holds, and zero Sell ratings. The average MCD stock price target is $331.27, implying 18.2% upside potential.
Also, on TipRanks, MCD stock has a 9 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
The Takeaway: MCD Stock Offers the More Viable Long-Term Choice
While McDonald’s has provided investors with steady, reliable returns, its loss of market share to key rivals presents concerns. However, with the broader economy facing pressures, consumers are looking for ways to save money. In this case, the trade-down effect could be a powerful catalyst for MCD stock. Ultimately, for patient investors, the Golden Arches could turn out to be surprisingly rewarding.
