McDonald’s
recent earnings report took a little shine off its stock—and created an opportunity for investors looking to buy shares in the Golden Arches.
Long-term, McDonald’s has been a winner. Its shares have returned 15% annualized over the past decade, including reinvested dividends, outpacing the
S&P 500’s
13%, and it’s done it with far less volatility. That trajectory was interrupted this week, when the fast-food giant’s fourth-quarter earnings beat expectations but its sales narrowly missed. The stock dropped 3.7%.
There’s nothing wrong with the business, however. The company’s earnings report overall revealed business as usual. Even with close to zero growth in the Middle East due to war in the region, total sales grew 8% to $6.41 billion, driven by higher menu prices and only a hair under analysts’ $6.45 billion forecast. Cost inflation, including commodity costs and wages, brought the gross margin lower, but the company was able to spend less on other items, which enabled it to report a profit of $2.95 a share, above estimates of $2.83. The drop was more likely a result of the stock’s 21% gain from its late October low heading into the results.
“Fourth-quarter results highlighted still solid U.S. same-store sales,” wrote UBS analyst Dennis Geiger.
McDonald’s long-term opportunity looks strong as well. It might seem difficult for a large company that’s already selling to much of the globe and talking about moderating price increases to grow briskly. But management’s focus on digital sales—think about apps such as Uber Eats and Seamless—allows it to increase revenue from signature products like chicken, burgers, and coffee.
That could set the company up for plenty of earnings growth. Analysts expect sales to grow by just over 4% annually to a touch above $30 billion by 2026.
“McDonald’s is well positioned to extend market share gains with leading value and other competitive advantages,” writes Geiger, who noted the company’s growing loyalty membership and digital presence in the quarter.
Sales growth could help profits grow at close to 6% if cost inflation is mild and profit margins remain stable. What’s more, McDonald’s says it plans to return all its free cash flow—some $10 billion—to investors in the form of buybacks and dividends, which should help earnings per share grow by nearly 10% to almost $15 by 2026, according to TD Cowen analyst Andrew Charles.
Earnings alone should move the stock higher, but McDonald’s could also see some multiple expansion. At 23.3 times 12-month forward earnings, it doesn’t look cheap. Still, it trades at just a 15% premium to the S&P 500’s 20.4 times, far below its historical level, buoyed by its brand, its ability to keep growing, and the cash it returns to shareholders. “I give this management team a lot of credit because they know what makes this brand tick,” Charles says. “It’s going to be a good stock.”
Next time you’re at a McDonald’s drive-through, you might want to consider picking up some of their stock, too.
Write to Jacob Sonenshine at [email protected]
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