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McDonald’s: Strong Business Momentum Makes Investors Happy
Stock Analysis & Ideas

McDonald’s: Strong Business Momentum Makes Investors Happy

As restaurants around the world have started re-opening following the easing of pandemic restrictions, McDonald’s seems to have benefitted from this trend. While the fear of the Delta variant still exists, it seems customers still have an insatiable appetite for McDonald’s ‘Happy Meals.’

McDonald’s (MCD) operates and franchises McDonald’s restaurants, quick-service restaurants (QSRs) that serve a menu of food and beverages in 119 countries. The QSR giant’s business segments include the U.S. and International Operated Markets (IOM). Currently, 93% of the company’s restaurants are franchised restaurants.

I am bullish on the stock as the strong business momentum continues for the company.

In the second quarter, the company posted revenues of $5.89 billion, surpassing analysts’ projections of $5.53 billion. Diluted earnings came in at $2.37 per share, better than the $2.08 a share that analysts expected. Global comparable sales were also up by 40.5%.

MdDonald’s President and CEO, Chris Kempczinski, commented, “Our performance is a continued demonstration of the broad-based strength and resiliency of our business as global comp sales in the second quarter increased nearly 7% over 2019. Along the way, we’ve always focused on following our customers’ needs, finding the most convenient and engaging ways for them to enjoy McDonald’s. It’s clear that our next chapter will be driven by our leadership in digital.”

The solid results were driven by stronger operating performances across all the key segments, on increased sales-driven restaurant margins. McDonald’s also benefited from fewer restaurant closures and the easing of COVID-19 restrictions. (See McDonald’s stock chart on TipRanks)

Additionally, the company’s sales through its digital channels ramped up strongly in Q2. McDonald’s year-to-date systemwide sales from digital channels, that is sales across its company-operated restaurants or franchise-operated ones in its top 6 markets, registered a 70% rise year-over-year, to $8 billion.

For FY21, the company now expects “full year systemwide sales growth in the mid to high teens in constant currencies.” Yet McDonald’s management also cautioned that “there is still some uncertainty as we continue to see pandemic-related stops and starts in markets around the world, especially now with the Delta variant.”

In the United States, MCD’s sales momentum continued in Q2, as comparable sales grew 15% on a two-year basis, its “strongest quarterly two-year growth in over 15 years.” The company’s management stated on its earnings call that this performance was a result of MCD’s “bold marketing initiatives, investing in the core menu and strengthening our digital offerings.”

Yesterday, Robert W. Baird analyst David Tarantino also came away bullish, and reiterated a Buy and a price target of $268 on the stock, following a conversation with a large franchisee of McDonald’s in the U.S.

The franchisee indicated that while “consumer demand levels have remained robust, but signaled that sales momentum has slowed in recent weeks as more significant staffing shortages have led to throughput constraints.”

Despite the staffing shortages, analyst Tarantino was of the view that “a valuation premium [for the stock] can be justified by MCD’s solid operating momentum, relatively durable business model, and high free cash flow yield.”

When it comes to international markets, the IOM segment saw comparable sales rise 75.1%, while international developmental license sales increased by 32.3%.

The company’s management stated on its earnings call that when it comes to the third quarter, it expects “comps to surpass pre-pandemic levels across all of our big five international markets. The past year has shown us that when markets reopen, customer demand for McDonald’s returns quickly.”

Indeed, around a week back, Oppenheimer analyst Brian Bittner indicated that his research showed “continued improvements across France, Germany, Italy and Spain which account for ~40% of IOM profits. Following our full segment analysis, we hold an upside bias to Street’s 2-year SSS [same store sales] for IOM over the next two quarters of +4.3%/+4.7%.”

The analyst reiterated a Buy and a price target of $270 (9.6% upside) on the stock.

Turning to the rest of the Street, Wall Street analysts are bullish about McDonald’s, with a Strong Buy consensus rating, based on 21 Buys and 3 Holds.

The average McDonald’s price target of $267.87 implies 8.7% upside potential from current levels.

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

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