Is McDonald’s Corp. a Buy?

FAN Editor

Not a lot of stocks can offer growth, value, and income, but that’s exactly what McDonald’s Corporation (NYSE: MCD) has done in recent years. Since CEO Steve Easterbrook took over the company in March 2015, the stock has increased 62%, easily outpacing the S&P 500‘s 26.4% gain during that time. Under Easterbrook’s leadership, McDonald’s has improved its performance with moves like offering all-day breakfast, refranchising international locations, and improving food sourcing and quality by banning antibiotics in chicken, pledging to use only eggs from cage-free chickens, and using fresh beef instead of frozen for its Quarter Pounders.

As a result, McDonald’s has posted superior comparable sales and profit growth at a time when much of the restaurant industry has struggled. However, past performance is not a guarantee of future returns, as the expression goes. Is McDonald’s a buy today? Let’s take a closer look at what the Golden Arches have to offer investors.

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1. Growth prospects

Despite McDonald’s strong fourth-quarter earnings report at the end of January, shares are down 7.5%. Comparable sales increased 5.5% in the quarter globally as traffic rose in all segments. Restaurants can grow revenue in two ways: through comparable sales or by adding new stores. Comparable sales, however, are much more effective as they avoid the costs needed to build and open new restaurants. As a mature company with more than 35,000 restaurants, McDonald’s will only be able to deliver modest growth by opening new restaurants, though it still expects to open 1,000 new locations in 2018, so comparable sales will be the best way for the company to achieve growth.

Since most of McDonald’s restaurants are franchised, the company is somewhat insulated from fluctuations in comp sales growth, but as long as that metric keeps increasing, profits should follow. Doing so will depend on the company continuing to improve its menu and experience with such things as delivery and new and improved offerings, but Easterbrook seems to have found success by catering both to McDonald’s value customers with a revamped dollar menu and all-day breakfast and those willing to pay for better-quality food like fresh beef.

Meanwhile, the company’s refranchising plan has helped cut costs and improved profitability.

2. Valuation

The chart below shows how McDonald’s price-to-earnings ratio compares to some of its peers.

Company Valuation
McDonald’s 24.9
Wendy’s 22.6
Restaurant Brands International 21.9
Yum! Brands 22.3
Starbucks 28.1

As you can see, McDonald’s is slightly more expensive than all of its traditional fast-food peers but cheaper than Starbucks. As a global brand with more than 35,000 locations, McDonald’s has no perfect peer, but considering its recent growth as the company has outgrown all its peers above on a comparable-sales basis, that valuation looks appealing. McDonald’s, which also offers an enticing 2.6% dividend yield, is a Dividend Aristocrat — having raised its quarterly payout every year for more than 25 years — an indication of the strength of its business model and commitment to returning capital to shareholders. Analysts expects earnings per share to increase 14% this year, a strong growth rate.

3. Competitive landscape

The restaurant business is changing quickly. The rise of the fast-casual sector has forced traditional incumbents to improve their food quality, and the growing popularity of e-commerce has made delivery an option for more customers with the proliferation of third-party services like GrubHub and Uber Eats.

At one point, McDonald’s seemed to be falling behind the so-called better-burger competition, but the fast-food giant has been able to outperform them in recent quarters with innovations and the brand promise of convenience, value, and tasty food. With segments like McCafe, all-day breakfast, and delivery, McDonald’s seems well positioned to adapt to the changing dynamics in the restaurant industry.

With solid growth prospects, a fair valuation, smart management, and a rock-solid brand, McDonald’s looks like a buy in today’s market. As long as the company can keep delivering solid comparable-sales growth, the stock should move higher.

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Jeremy Bowman owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Grubhub. The Motley Fool has a disclosure policy.

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