McDonald’s (NYSE: MCD), the world’s largest restaurant chain, consisting of more than 41,000 mostly franchised stores in over 100 countries, stock has been almost flat (Jan.8) since the beginning of last year, 2024, compared to a 24% return of the S&P 500 over the same period. MCD’s peer Restaurant Brands International Inc.(NYSE: QSR) stock fell 16% during the same period. Also see What’s Next For Lyft’s Stock?
So what’s happening with MCD stock?
The recent E. coli outbreak has wiped out McDonald’s stock gains for 2024, with the share price now back to its starting point for the year 2024. This E. coli outbreak has reportedly sickened at least 104 people and resulted in one death. The outbreak appears to be connected to contaminated onions used in the company’s burgers. To add to this, McDonald’s Q3 results were underwhelming, with revenue rising only 3% year-over-year (y-o-y) to $6.9 billion. Rising costs outpaced revenue growth, leading to a 3% decline in net income to $2.3 billion in Q3. Also, the company’s same-store sales in the U.S. inched up 0.3%, but globally, they fell 1.5% in Q3. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
The third quarter results were largely consistent with McDonald’s previous quarterly performance when the company reported a 1% decline in global comparable sales for the June quarter. However, the U.S. market showed relative resilience, with same-store sales slipping by a more modest 0.7%. The timing of the outbreak could exacerbate the impact on McDonald’s financials, potentially leading to a further decline in sales and earnings in Q4 and possibly beyond. Although value meals are attracting some customers back to McDonald’s, this strategy comes with a trade-off: it puts pressure on gross margins.
Price increases have been a key part of the company’s strategy and a way to offset inflation costs. But it may not be able to do that without impacting overall demand. The company signaled that consumers have begun to push back due to the continued menu price increases in 2024. McDonald’s has a larger proportion of lower-income customers so pricing power could be an issue in the future. The company faces headwinds from across all its major markets (namely the U.S., the U.K., Australia, Germany, Canada, and Japan) regarding slowing traffic. In fact, the company expects the quick-service restaurant industry traffic in the U.S. to be negative for the full year 2024. Right now, there are warning signs that should not be overlooked.
But over the longer term, the company could benefit due to its aggressive push into the digital and home-delivery niches, higher cash in hand, and its ability to perform in challenging economic environments and maintain culturally relevant menus around the world. McDonald’s shares are currently trading at a forward P/E ratio of 25x, which is below their five-year average of 28x. This relatively lower valuation suggests that the stock may have the potential for long-term growth.
We forecast McDonald’s revenues to be $26.2 billion for the fiscal year 2024, up 3% y-o-y. Given the changes to our revenues and earnings forecast, we have revised our McDonald’s Valuation to $294 per share, based on $11.81 expected EPS and a 24.9x P/E multiple for the fiscal year 2024 – almost in line with the current market price.
The increase in MCD stock over the last 4-year period has been far from consistent, although annual returns were considerably less volatile than the S&P 500. Returns for the stock were 28% in 2021, 1% in 2022, 15% in 2023, and 0% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
McDonald’s management skipped Q4 guidance, shifting investor focus to same-store sales growth, particularly internationally. The company’s success now depends on the effective execution of digital strategies and innovative menu offerings to navigate market challenges.
It is helpful to see how its peers stack up. MCD Peers shows how McDonald’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
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