McDonald’s stock (NYSE: MCD) is set to report its fiscal second-quarter results on July 29. Analysts expect MCD stock to trade higher, with revenues and earnings beating expectations slightly for Q2. The stock has seen a decline this year, dropping from $297 to $251, underperforming the broader market. However, it is noted that McDonald’s faces challenges such as rising costs and potential pricing power issues due to its larger proportion of lower-income customers. Investors are closely watching for signals in the upcoming results, especially as the company expects negative traffic in the U.S. quick-service restaurant industry for the full year 2024. Despite warning signs, McDonald’s is seen as a solid long-term bet due to its aggressive digital and home-delivery strategies, strong cash position, and ability to navigate challenging economic environments. With MCD shares currently trading at a valuation below its five-year average, there is potential for the stock to move higher in the long term.
McDonald’s stock has shown gains of 25% from early 2021 to around $251 currently. While this marks an increase over the last three years, outperforming the S&P 500 by 25%, the stock has struggled to consistently beat the market despite positive returns in each of the last three years. In 2023, McDonald’s underperformed the S&P 500, highlighting the challenges individual stocks have faced in beating the benchmark index. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period. As uncertainties in the macroeconomic environment persist, questions arise about whether McDonald’s could face a similar situation as in 2023 and underperform the market or see strong growth in the coming months.
Analysts forecast McDonald’s valuation to be $280 per share, representing an 11% increase from the current market price. Revenues for Q2 2024 are expected to be around $6.7 billion, slightly ahead of consensus estimates. The company’s revenue growth in Q1 was driven by global comparable sales, with the U.S. sales rising 2.5% and International Operated Markets seeing a 2.7% increase. Looking ahead, McDonald’s expects to allocate capital expenditures towards new restaurant unit expansion across the U.S. and International Operated Markets. The company’s franchise model and diverse revenue streams make it a reliable source of inflation-resistant income, with a significant portion of revenue coming from company-owned restaurants.
In terms of earnings per share (EPS), McDonald’s is likely to beat consensus estimates marginally for Q2 2024, with an expected EPS of $3.10 as per Trefis analysis. The company’s adjusted bottom line grew 2% year-over-year to $2.70. When considering the stock price estimate, McDonald’s valuation suggests a price of $280, which is almost 11% higher than the current market price. This valuation is based on an EPS estimate of around $12.21 and a P/E multiple of 22.9x for fiscal 2024. The analysis also compares McDonald’s stock against its peers to provide a comprehensive view of how the company stacks up in the industry.
Overall, McDonald’s faces challenges related to rising costs and pricing power issues, but remains a solid long-term investment due to its strategic initiatives, financial strength, and ability to adapt to changing market conditions. Investors will be closely monitoring the company’s second-quarter results for insights into its performance and outlook. With a positive forecast and potential for growth, McDonald’s stock could present opportunities for investors looking for stable returns in the restaurant industry.
