The popular restaurant operator McDonald's (MCD) announced fourth-quarter results that surpassed expectations, despite the unfavorable macroeconomic conditions. However, with the increased market instability, the stock has declined over the past few months and seems to be trading at a discount. This could be the right opportunity to invest in this large-cap stock. Keep reading...

Following a series of strong economic data, the Federal Reserve is highly anticipated to increase interest rates beyond the market’s initial expectations. However, investors should not deter from investing in quality stocks that can deliver returns despite the anticipated turmoil.

I think large-cap retail restaurant giant McDonald’s Corporation (MCD), which is currently trading at a discount, might be a solid investment. Although the stock has declined 3.7% over the past three months, it looks poised for long-term gains.

Despite the uncertainty in the market, shares of MCD have gained 18% over the past year to close the last trading session at $262.03. It has a market capitalization of $191.67 billion.

In terms of forward non-GAAP P/E, MCD’s 25.94x is 5.5% lower than its five-year average of 29.46x. It's 21.61x forward EV/EBIT is 3.1% lower than the five-year average of 22.29x. In addition, its forward EV/EBITDA multiple of 18.31 is 2.4% lower than the five-year average of 18.77.

The restaurant giant reported better-than-expected earnings results for the fourth quarter that ended December 2022. Its same-store sales rose due to higher menu prices, increased guest counts, and more marketing efforts. Also, digital sales in the company's six leading markets amounted to $7 billion, representing over 35% of total sales in the same quarter.

Chris Kempczinski, President and CEO of the company, said, "Our Accelerating the Arches strategy is driving growth and building brand strength, delivering exceptional full-year performance in 2022 with over 10% comparable sales growth and 5% comparable guest count growth globally."

MCD’s annual dividend of $6.08 yields 2.32% on the prevailing market price, and its four-year average yield is 2.26%. The company has raised its dividend payouts at CAGRs of 6.4% over the past three years and 8.3% over the past five years.

Here’s what could influence MCD’s performance in the upcoming months:

Robust Financials

MCD’s revenues from franchised restaurants increased 7.5% year-over-year to $3.65 billion in the fiscal fourth quarter that ended December 31, 2022. Its operating income grew 7.7% from the prior-year quarter to $2.58 billion.

Also, its non-GAAP net income rose 13.3% year-over-year to $1.90 billion, while non-GAAP EPS came in at $2.59, indicating a 16.1% year-over-year increase.

High Profitability

MCD’s trailing-12-month gross profit margin of 56.97% is 62.8% higher than the 35% industry average. Its 44.62% trailing-12-month EBIT margin is 486.8% higher than the industry average of 7.60%. The stock’s 26.65% trailing-12-month net income margin is 482.5% higher than the industry average of 4.57%.

Moreover, its trailing-12-month levered FCF margin of 22.75% is significantly higher than the 1.52% industry average. MCD’s trailing-12-month ROTC and ROTA of 14.77% and 12.25% are 133.7% and 208.7% higher than their respective industry averages of 6.32% and 3.97%.

Favorable Analyst Estimates

Analysts expect MCD’s revenue for the second quarter ending June 2023 to be $6.09 billion, indicating a 6.5% year-over-year growth. The company’s EPS for the same quarter is expected to increase by 4.3% from the prior-year quarter to $2.66.

The consensus revenue estimate of $24.40 billion for the fiscal year 2023 reflects a growth of 5.2% from the prior year. The consensus EPS estimate of $10.59 for the same year indicates a 4.8% year-over-year improvement. Additionally, the company has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.

POWR Ratings Show Promise

MCD has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different 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, in sync with its high profitability.

It has a B grade for Stability and Sentiment, consistent with its 24-month beta of 0.64 and optimistic analyst estimates.

Among the 46 stocks in the B-rated Restaurants industry, MCD is ranked #9.

To access MCD’s Growth, Value, Momentum, and Sentiment ratings, click here.

Bottom Line

Despite the macroeconomic volatility, MCD is trading above its 200-day moving average of $259.38. Its strong fundamentals have supported its solid record of dividend growth. It has raised dividends for 21 consecutive years.

Furthermore, while MCD expects short-term inflationary pressures to persist in 2023, the company remains confident in its Accelerating the Arches plan, emphasizing new restaurant openings. The company's recently announced Accelerating the Organization initiative aims to increase efficiency and innovation.

Considering its solid fundamentals and remarkable dividend growth history, I think the stock might be a solid buy.

How Does McDonald’s Corporation (MCD) Stack up Against Its Peers?

MCD has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Restaurants industry with an A (Strong Buy) or B (Buy) rating: Potbelly Corporation (PBPB), Good Times Restaurants Inc. (GTIM), and Nathan’s Famous, Inc. (NATH).

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MCD shares fell $0.03 (-0.01%) in premarket trading Monday. Year-to-date, MCD has declined 0.00%, versus a 0.91% rise in the benchmark S&P 500 index during the same period.

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About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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