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McDonald’s Stock: Strong Business at Rich Valuation

I am neutral on McDonald’s (MCD) because the strength in the underlying business is likely going to wane in coming quarters as COVID-19 tailwinds wear off, and the stock price trades at a slight premium to historical averages.

McDonald’s is the world’s biggest fast-food chain by revenue, and serves over 69 million customers every day in over 100 countries. The company has over 39,000 locations, and about 935 of its outlets across the globe are owned and operated by independent business owners. (See Analysts’ Top Stocks on TipRanks)

Strengths

In the first half of 2021, McDonald’s reported system-wide digital sales of approximately $8 billion.

The fast-food chain is now looking to hold on to these sales that it gained during the pandemic, and launched a loyalty program in the United States in early June.

Currently, 12 million McDonald’s customers nationwide have joined the program.

Recent Results

In its Q2 2021 report, McDonald’s reported revenues of $5.9 billion, beating analysts’ estimates for $5.7 billion, and showing a rise of 56.5% from the previous year.

At company-operated restaurants, revenues were up 56.1% to $2.5 billion, and at franchise-operated restaurants, revenues were up 58.3% to $3.3 billion.

The improvement was attributed to an increase in global comparable sales. In addition, its new Crispy Chicken Sandwich and partnership with Korean idol band BTS also resulted in strong demand in the U.S.

Aside from the United States, the company saw recovery and high gains in many regions. Its international-operated market segments, which include the U.K. and France, reported same-store sales growth of 75.1% year-over-year. McDonald’s stated that loosening restrictions and fewer temporary closures improved sales for that segment.

The company also reported earnings of $2.37 per share, excluding strategic gains and income tax benefits from the U.K., beating consensus estimates that stood at $2.11 per share.

The company also raised its full-year forecast and now predicts systemwide sales growth in the mid-to-high teens — an improvement from its previous outlook of mid-teens.

Valuation Metrics

McDonald’s stock looks richly valued right now as its EV/EBITDA and P/E ratios indicate that the stock is trading above its historical average.

The EV/EBITDA ratio is currently 18.8x, compared to its five-year average of 16.9, and its P/E ratio is currently 25.8x, compared to its five-year average of 24.20x.

That said, the company is expected to grow EBITDA by 6.6% in 2022, so the growth prospects are decent.

Wall Street’s Take

From Wall Street analysts, McDonald’s earns a Strong Buy analyst consensus based on 21 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average McDonald’s price target of $268.70 puts the upside potential at 9.2%.

Summary and Conclusions

McDonald’s continues to generate strong growth thanks to the COVID-19 tailwinds for drive-through and fast-food businesses at the expense of dine-in restaurants. Now, it is investing aggressively in its loyalty program to try to keep the customers that it gained during COVID-19.

While the stock looks richly valued compared to its historical averages, Wall Street analysts are overwhelmingly bullish on it and the growth outlook is decent. As a result, it might be a good buy, but investors might want to wait for a pullback to where the valuation multiples are more in line with historical averages.

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

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