McDonald's Corporation (MCD) reported its fourth-quarter results on February 5. The company comfortably surpassed the consensus EPS estimate, but its revenue came below Wall Street estimates. In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock.
For the fourth quarter, MCD’s EPS was 4.4% above the consensus estimate, but its revenue was 0.7% lower than analyst estimates. This was its first quarterly sales miss in nearly four years. The company continued its stellar earnings history, beating the consensus EPS estimate in each of the trailing four quarters.
Same-store sales in the U.S. rose 4.3% during the fourth quarter and by 4.4% in the International Operated Markets (IOM), driven by the strong performance in the United Kingdom, Germany, and Canada. Its comparable sales in the International Developmental Licensed Markets & Corporate rose just by 0.7% in the fourth quarter as sales suffered due to the war in the Middle East. Also, its systemwide sales rose 6% in the previous quarter.
MCD’s President and CEO Chris Kempczinski said, “Our global comparable sales growth of 9% for the year is a testament to the tremendous dedication of the entire McDonald’s System. Strong execution of our Accelerating the Arches strategy has driven over 30% comparable sales growth since 2019 as our talented crew members and the industry’s best franchisees and suppliers have demonstrated proven agility with a relentless focus on the customer.”
“By evolving the way we work across the System, we remain confident in the resilience of our business amid macro challenges that will persist in 2024,” he added. The company has a target of 50,000 restaurants by 2027. Along with the restaurants it opened last year, MCD expects its net restaurant expansion in 2024 to contribute nearly 2% to system-wide sales growth.
MCD’s sales in the Middle East have taken a hit due to boycotts and protests after its Israeli licensee donated free meals to members of the Israeli military. Anti-Israeli campaigners have been boycotting and protesting against several Western companies. MCD has about 5% of its total outlets in the Middle East. MCD is also witnessing an impact on its sales in France and Muslim-majority countries of Malaysia and Indonesia.
The company expects its operating margin to be between mid to high 40% this year. Its capital expenditures are expected to be between $2.5 billion and $2.7 billion, more than half of which will be used for new unit openings across its U.S. and IOM segments. MCD plans to open more than 2,100 restaurants this year, with nearly 500 of these openings in the U.S. and IOM segments.
The company aims to open more than 1,600 restaurants in its IDL segment this year, including 1,000 in China. Its free cash flow conversion is expected to be in the 90% range. Meanwhile, its interest expense this year is expected to increase between 9% and 11% compared to last year due to higher debt balances and interest rates.
MCD’s stock has gained 5.9% over the past three months but declined 4% over the past nine months to close the last trading session at $284.65.
Here’s what could influence MCD’s performance in the upcoming months:
Robust Financials
MCD’s revenues for the fourth quarter ended December 31, 2023, increased 8.1% year-over-year to $6.41 billion. Its operating income rose 8.5% over the prior-year quarter to $2.80 billion. The company’s non-GAAP net income increased 12.7% year-over-year to $2.14 billion. Also, its non-GAAP EPS came in at $2.95, representing an increase of 13.9% year-over-year.
For the fiscal year ended December 31, 2023, MCD’s revenues rose 10% year-over-year to $25.49 billion. Its operating income rose 24% over the prior-year period to $11.65 billion. The company’s non-GAAP net income increased 17% year-over-year to $8.74 billion. Also, its non-GAAP EPS came in at $11.94, representing an increase of 18% year-over-year.
Favorable Analyst Estimates
Analysts expect MCD’s EPS and revenue for fiscal 2024 to increase 4.2% and 5.6% year-over-year to $12.44 and $26.92 billion, respectively. Its fiscal 2025 EPS and revenue are expected to increase 8.8% and 6% year-over-year to $13.53 and $28.53 billion, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, MCD’s 22.89x is 44.7% higher than the 15.82x industry average. Its 3.02x forward non-GAAP PEG is 82.6% higher than the 1.65x industry average. Likewise, its 17.20x forward EV/EBITDA is 74.1% higher than the 9.88x industry average.
High Profitability
In terms of the trailing-12-month EBITDA margin, MCD’s 47.58% is 334.2% higher than the 10.96% industry average. Likewise, its 30.08x trailing-12-month levered FCF margin is 455.3% higher than the industry average of 5.42x. Also, its 9.25% trailing-12-month Capex/Sales is 201.8% higher than the industry average of 3.06%.
POWR Ratings Reflect Uncertainty
MCD has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MCD has a D grade for Value, consistent with its stretched valuation. It has an A grade for Quality, in sync with its high profitability.
MCD’s stock is trading below its 20-day moving average of $291.21 and above its 200-day moving average of $283.76, justifying its C grade for Momentum.
MCD is ranked #9 out of 42 stocks in the Restaurants industry. Click here to access MCD’s Growth, Stability, and Sentiment ratings.
Bottom Line
MCD has robust growth plans for this year and beyond, with new restaurant openings over the past year contributing to systemwide sales. However, the company is witnessing a slower start this year due to comparison to a stronger first quarter last year and the rough weather in January. Also, the company expects the war to have a negative impact on Systemwide sales and revenue as long as it continues.
Furthermore, MCD trades at an expensive valuation. Given its mixed momentum and the overall uncertain operating environment, it could be wise to wait for a better entry point in the stock.
How Does McDonald's Corporation (MCD) Stack Up Against Its Peers?
MCD has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Restaurants industry: Rave Restaurant Group, Inc. (RAVE), Nathan's Famous, Inc. (NATH), and Domino's Pizza Group plc (DPUKY). For exploring more Buy-rated Restaurants stocks, click here.
What To Do Next?
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MCD shares were trading at $287.32 per share on Wednesday afternoon, up $2.67 (+0.94%). Year-to-date, MCD has declined -3.10%, versus a 4.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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