Down 12% This Year, What’s Going On With McDonald’s Stock?

After a 12% decline since the beginning of the year, at the current price of around $260 per share, we believe McDonald’s (NYSE: MCD)The world’s largest restaurant chain, with more than 40,000 mostly franchised stores, has likely limited its near-term gains. MCD shares have fallen from about $297 to $260 since the start of the year, largely underperforming broader indices, with the S&P up about 17% over the same period. By comparison, MCD’s peer Shares of Restaurant Brands International Inc. (NYSE: QSR) fell 4% to $75 during the same period. The decline in MCD shares can be attributed to investor concerns about rising costs. Price increases have been a key part of the company’s strategy and a way to offset inflation-related costs. But it may not be able to do so without impacting overall demand. On its first-quarter earnings call, the company reported that consumers have begun to rebel against continued menu price increases. McDonald’s has a larger share of lower-income customers, so pricing power could be an issue going forward. The company faces headwinds in all of its major markets (namely the U.S., U.K., Australia, Germany, Canada, and Japan) from slowing traffic. In fact, the company expects U.S. QSR traffic to be negative for all of 2024. Right now, there are some warning signs that shouldn’t be ignored. But over the longer term, the company could be a good opportunity given its aggressive push into digital and home delivery, its stronger liquidity, and its ability to perform in tough economic environments and maintain culturally relevant menus around the world (such as in India). It’s worth noting that MCD shares are trading at a valuation of 22x forward P/E, which is similar to Yum! Brands (NYSE: YUM) and Starbucks (NASDAQ: SBUX). MCD’s current P/E is below its five-year average of 28x, indicating that the stock could rally again in the long term.

MCD stock has posted solid gains of 20% from $215 in early January 2021 to around $260 today, compared to an increase of around 50% for the S&P 500 over that roughly 3-year period. However, MCD stock’s increase has been far from consistent. The stock’s returns have been 25% in 2021, -2% in 2022, and 13% in 2023. By comparison, the S&P 500’s returns have been 27% in 2021, -19% in 2022, and 24% in 2023, indicating that MCD underperformed S&P in 2021 and 2023.

Actually, consistently beating the S&P 500 — in good times and bad — has been tough in recent years for individual stocks; for consumer discretionary heavyweights including AMZN, TSLA and HD, and even mega-cap stars GOOG, MSFT and AAPL. In contrast, the Trefis High Quality portfolio, with a collection of 30 stocks, has has outperformed the S&P 500 every year during the same period. Why is that? As a group, the stocks in the HQ portfolio have delivered better returns with less risk compared to the benchmark; less of a roller coaster ride as reflected in the HQ portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and high interest rates, could MCD face a similar situation as in 2021 and 2023 and underperform the S&P over the next 12 months – or will there be a sharp increase?

McDonald’s first-quarter revenue increased 5% year-over-year to $6.2 billion, based on 2% global comparable sales growth. While not a huge increase, it was the company’s 13th consecutive quarter of global comparable store growth and comes against a tough 12.6% year-over-year comparison a year ago. Comparable sales were driven by a 2.5% increase in U.S. sales, a 2.7% increase in international operated markets, and a decline of just 0.2% in international licensed markets in development (after boycotts in the Middle East weighed on traffic). Additionally, McDonald’s adjusted net income increased 2% year-over-year to $2.70. Looking ahead, MCD expects capital expenditures in 2024 to be in the range of $2.5 billion to $2.7 billion, with more than half of that spending going toward new restaurant expansions in the U.S. and internationally operated markets.

MCD stock is a great source of inflation-resistant income. McDonald’s franchises typically don’t own the building. These franchises agree to lease their stores from the parent company, which provides them with additional income on top of franchise fees and other royalties. As of the first quarter of 2024, about 38% of the company’s revenue came from sales at company-owned restaurants. These sales come from about 5% of McDonald’s company-owned restaurants. The remaining 95% are franchises.

We expect McDonald’s revenue to be $26.9 billion in fiscal 2024, up 5% year over year. On the bottom line, we now expect EPS to be $12.21. Given the changes to our revenue and earnings guidance, we have revised our forecast McDonald’s Review at $280 per share, based on expected EPS of $12.21 and a P/E multiple of 22.9x for fiscal 2024, nearly 7% above the current market price.

It’s useful to see how your peers are stacking up. MCD Peers shows how McDonald’s stock stacks up against its peers on important metrics. You’ll find more useful comparisons for companies across all industries at Peer Comparisons.

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