McDonald’s (MCD) was founded in California by Richard and Maurice McDonald, who began selling their burgers on a concession stand. In 1955, Ray Kroc noticed the systematic approach they had to make a burger, and he joined them to sell their franchises. After a few years, Ray Kroc had acquired the business from Richard and Maurice.
Later on, Ray had transformed the McDonald’s business model into a full-fledged fast food restaurant. As of now, the company employs more than 4.2 million worldwide.
I am neutral on McDonald’s stock as it has a strong competitive position within the fast-food industry, a lengthy growth runway, and near-unanimous support from Wall Street analysts. On the other hand, valuation multiples are well above historical averages, and the average price target indicates weak upside potential over the next year.
Strengths
One of MCD’s core strengths is its targeted product development and market penetration approach. This is undoubtedly one of the biggest reasons the company has positioned itself as the market leader globally.
According to several studies, the company has one of the strongest brands in the world. It has more than 31,000 restaurants in approximately 120 countries, making it easy for the company to benefit from economies of scale. Its income is also stable since over 90% of McDonald’s franchisees own the location, which is why they look after the operational aspects themselves.
Recent Results
McDonald’s reported that its income for the third quarter was $2.15 billion, increasing from the $1.76 billion in the same quarter last year. Its earnings per share increased to $2.86, while last year, this number stood at $2.35. Net sales increased by 16% to $6.2 billion even though Wall Street analysts had predicted a lower figure.
Moreover, since the company has started its loyalty program in the USA, 21 million members have joined the program, among which 15 million are active. One of the challenges that the company faced was the shortage of staff.
Valuation Metrics
MCD stock looks a bit overvalued at the moment. Its forward enterprise-value-to-EBITDA ratio is elevated at 18.9 times compared to its historical average of 17.2 times.
Furthermore, its forward price-to-normalized-earnings ratio is 26.1 times compared to its historical average of 24.5 times. Analysts expect the company to see revenue, EBITDA, and normalized earnings-per-share growth in 2022 in the range of 5.7% to 8.1%.
Wall Street’s Take
According to Wall Street analysts, MCD earns a Strong Buy consensus rating based on 22 Buys and four Hold Ratings assigned in the past three months. Additionally, the average McDonald’s price target of $282.36 puts the upside potential at 7.6%.
Summary and Conclusions
McDonald’s has one of the most prominent, well-respected, and valuable brand names and business models in the global fast-food industry. Furthermore, its franchise-focused business model has proven to be a very lucrative and sustainably scalable strategy.
It boasts a lengthy and impressive track record of growing dividends per share and generating outstanding total returns for shareholders. On top of that, Wall Street analysts are overwhelmingly bullish on the stock, and the company is expected to continue growing at a decent clip next year.
That said, the share price looks a bit stretched here as valuation multiples exceed historical averages by a decent amount and the average price target indicates only minimal upside over the next year for the stock price. As a result, investors might wait for a pullback in the share price before opening a position.
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