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Is McDonald's Stock a Smart Buy After Sell-Off and Earnings?

By: MarketBeat

October 29, 2024 at 12:15 PM EDT

Lviv, Ukraine - October 9, 2023: McDonald's menu on wooden table outdoors, space for text — Photo

Some of the market’s biggest blue-chip stocks are not immune to offering discounts to investors; it’s not that often that participants can exploit the short-term nature of these mispricing events, so when they come along, investors need to act fast before others come in to close the gap. Such an opportunity has come recently through one of the biggest household names in the United States today, though it may not last long considering what could be about to happen.

This opportunity can be found in shares of retail giant McDonald’s Co. (NYSE: MCD), especially as the stock recently experienced a sell-off as big as 6.9% after a few locations were reported to have an E. coli outbreak threatened not only the sentiment for the stock but also the safety its underlying financials moving forward. However bearish this event may be, markets have their own opinions.

These opinions are leaning on the bullish side of the equation for reasons investors will soon discover. Discounts are still available for retail investors. Wall Street analysts still think that McDonald’s stock has enough tailwinds and strength behind it to deliver a double-digit rally in the coming months, amplified by the recent sell-offs resulting from the E. coli outbreak that is mostly behind the brand now.

McDonald's: Are Clear Skies Ahead for the Stock?

One reason the stock has found support relatively quickly, compared to the date of the news breakout, is that the company’s items were cleared of contamination after investigations. As of today, the record shows that McDonald’s meat patties have no trace of E. coli, negating the reason for the sell-off in the first place.

These reports suggest that onions are infected with E. coli, though E. coli mostly lives in meat, so that’s another reason to dismiss these concerns and consider buying the stock at these lows. Some would assume that the skies are cleared for McDonald’s stock today, but how high does that clear sky go?

Wall Street analysts and their ratings could be a good place to start looking for answers. McDonald’s stock’s current price target is $318.2 a share, calling for a net upside of only 7.2%. However, this consensus price target reflects old views before the incident, and its price action reiterated the company’s strength in the market.

Noticing the quick recovery in the stock’s price in the face of what could have been a terrible outcome, some analysts decided to break above the consensus for this stock’s valuation. Those at Wells Fargo and Bank of America now see a respective price target of $350 and $322 a share for McDonald’s stock today, calling for 17.7% and 8.3% upside.

Of course, these targets have to be justified by McDonald's future potential growth and historical valuations compared to where the company is trading today. To this point, investors can look at the Wall Street projection for earnings per share (EPS) during the next 12 months.

High Margins, Steady Growth, and Premium Valuations Signal More Upside

Analysts now expect McDonald’s to deliver up to $3.34 in EPS for the same quarter next year, which calls for a net growth in earnings of as much as 12.5%. While impressive by itself, the effect is amplified when investors consider the fact that McDonald’s is a $217.8 billion behemoth.

Now that the company has released its latest quarterly earnings results, investors have a new way to think about the stock's future. While sales were up 3% on a consolidated basis, kept at bay from international weaknesses, cash flows were strong enough to allow for a 6% increase in today's quarterly cash dividend.

A 1% increase in EPS may not sound like much, but it’s enough when considering that the U.S. consumer has been battling higher inflation lately. This trend could drive more demand for affordable McDonald’s meals in the coming quarters.

The stock reacted with a slight 1% advance on the release, not aggressive by any means, but still a good sign of a potential recovery in the making after the E. coli incident is over. More than that, markets are still pushing for further upside through different gauges. When investors want to gauge what the market thinks about a stock, they can look to different valuation metrics compared to those seen in peers within the same niche. In this methodology, an outlier premium would suggest market expectations for outperformance.

On a price-to-sales (P/S) basis, McDonald’s stock trades at a much higher multiple of 8.5x today, compared to the rest of the eating places industry’s average valuation of only 2.6x. This same premium trend can be extrapolated to forward price-to-earnings (P/E) ratios.

A close competitor and peer can be found in Wendy’s Co. (NASDAQ: WEN), which trades at 19.4x forward P/E today and below McDonald’s 23.6x forward P/E multiple. More specifically than valuations, a large institutional buyer was willing to make a bullish view public after the apparent E. coli incident.

Those at Australian Supper Pty decided to boost their stake in McDonald’s stock by 14.5% as of late October 2024, bringing its net investment to a high of $232.1 million today. More than that, investors can see the 3.6% decline in short interest for the stock when the opposite might have been expected.

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Is McDonald's Stock a Smart Buy After Sell-Off and Earnings?

McDonald's: Are Clear Skies Ahead for the Stock?

High Margins, Steady Growth, and Premium Valuations Signal More Upside

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