Currently Trading Near All-Time Highs, is McDonald's Still a Buy?

Prominent global foodservice retailer McDonald's Corporation (MCD) in Oak Brook, Ill., operates and franchises more than 39,000 McDonald's restaurants worldwide. The U.S., international lead markets, high growth markets, foundational markets, and corporate are among the company's target market segments.

The stock has gained 27.7% in price over the past year and 14.9% over the past six months. The stock hit its all-time 52-weeks high of $271.15 yesterday, before closing the session at $268.51.

MCD's global business has continued to rebound despite the recent reinstatement of COVID-19 restrictions in several key markets. Comparable store sales rose 12.7% versus a 2% decline in 2020 when several of its locations were temporarily closed, or at least closed to in-store dining. In addition, its revenue improved compared to 2019, with sales up 10% on a two-year basis.              

Here is what could shape MCD's performance in the near term:

Strategic Growth Plan

In Nov. 2021, MCD announced a strategic agreement with DoorDash, Inc. (DASH), an online meal ordering and food delivery platform, and Uber Technologies, Inc.'s (UBER) Uber Eats, an online food ordering and delivery platform, to support the expansion of MCD's McDelivery business. MCD anticipates that the arrangement will boost sales, benefit the company's franchisees, and generate more profit and cash flow.

Robust Financials

During the third quarter, ended Sept. 30, 2021, MCD's total revenue increased 14.5% year-over-year to $6.20 billion. Its operating income increased 18.2% year-over-year to $2.98 billion. The company's net income grew 22% from its year-ago value to $2.15 billion, while its EPS grew 21.7% from the prior-year quarter to $2.86.

Strong Profitability

MCD's 53.7% trailing-12-months gross profit margin is 49.6% higher than the 35.9% industry average. Also, its ROC, net income margin, and ROA are 80.9%, 392.7%, and 132.5% higher than the respective industry averages. Furthermore, its $8.47 billion cash from operations is 4509.5% higher than the $183.7 million industry average.

Impressive Growth Prospects

The $5.64 billion consensus revenue estimate for the next quarter (ending March 2022) indicates a 12.2% improvement year-over-year. And analysts expect MCD's EPS to rise 15.1% from the same period last year to $2.21 in the next quarter.

The Street expects MCD's revenues and EPS to rise 21.1% and 55.5%, respectively, year-over-year to $23.26 billion and $9.41 in its fiscal year 2021. In addition, MCD's EPS is expected to rise at a 21.6% CAGR over the next five years. Also, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in three of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Of the 26 Wall Street analysts that rated MCD,22 have rated it Buy, and four rated it Hold. The 12-month median price target of $280.92 indicates a 4.62% potential upside. The price targets range from a low of $260.00 to a high of $314.00.

POWR Ratings Reflect Solid Prospects

MCD has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MCD has an A grade for Quality. MCD's solid earnings and revenue growth potential is consistent with the growth grade.

The stock also has a B for Sentiment and Stability. Optimistic analyst estimates are in sync with the Sentiment grade. In addition, MCD has a 0.58 beta, which justifies the Stability grade.

Of the 46 stocks in the B-rated Restaurants industry, MCD is ranked #16.

Beyond what is stated above, we have graded MCD for Growth, Value, and Momentum. Get all MCD ratings here.

Bottom Line

MCD's shares soared 7.7% in price over the past month based on its solid fundamentals with robust revenue growth in its last reported quarter. Its strategic growth plan should further drive its long-term growth across all the business segments. So, we think it could be wise to add the stock to one’s portfolio now.

How Does McDonald's Corporation (MCD) Stack Up Against its Peers?

MCD has an overall grade of B in our proprietary rating system. This rating is superior to its industry peers, Restaurant Brands International Inc. (QSR), Compass Group Plc (CMPGY), and Del Taco Restaurants Inc. (TACO), which have a C (Neutral) rating.

MCD shares were trading at $268.58 per share on Wednesday morning, up $0.07 (+0.03%). Year-to-date, MCD has gained 0.19%, versus a 0.61% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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