Key points
- McDonald’s had a mixed quarter, but the revenue weakness is negligible and the margins are brilliant.
- The war in the Middle East is weighing on growth in developing markets, but comps everywhere are still solid.
- The stock could retreat 5% to 10%, creating another buying opportunity with growth acceleration expected later this year.
- 5 stocks we prefer to McDonald’s
McDonald’s NYSE: MCD had a solid quarter, but headwinds impacted profits and will persist for the foreseeable future. Headwinds include war in the Middle East and retreating consumer spending in the United States, but that’s the worst news. Headwinds aside, the company continues to grow and gain traction in existing and new markets, providing leverage for growth throughout the year.
War in the Middle East is unpredictable; it could last for years, but the FOMC is expected to cut rates later this year and ease pressure on consumer dollar spending. Between then and now, MCD stock could return to more significant support levels and open up a buy-the-dip opportunity for investors.
McDonald’s growth slows, but margin widens
McDonald’s fourth quarter is mixed compared to Marketbeat.com analysts’ estimates, but the earnings weakness is negligible in light of the earnings strengths. Revenue of $6.41 billion rose 8.1% from last year, helped by a 2% forex tailwind, but missed consensus by $0.040 billion or 60 basis points. Overall compounds rose 3.4% globally, led by a 4.4% gain in international managed markets and a 4.3% gain in the United States. U.S. compensation was slightly below expectations and attributed to a decline in spending by low-income customers.
Margin news is shareholder-friendly. GAAP margin contracted slightly due to restructuring and repositioning efforts, but less than expected, and stock repurchases helped profits. GAAP EPS grew 8%, aligning with revenue performance, with adjusted earnings up 14%. The adjusted $2.95 is also $0.12 better than forecast, and margin strength should continue into the first half of 2024.
McDonald’s gave no guidance, but factors suggest another year of solid, if slowing, growth in 2024. Those include plans to open 2,100 more locations, the burger quality trend and CosMc. The new locations are expected to generate revenue growth of at least 2%. They will help margin over time, while small changes to burger preparation will increase overall satisfaction, loyalty and return visits. Loyalty sales are a significant source of traffic for the company and increased 45% in the fourth quarter.
The CosMc concept is still in its early development stage, but the single location appears to be working very well. Ten more CosMc locations are planned by the end of the year; they won’t move the needle on 2024 results, but they could significantly alter the long-term outlook.
McDonald’s valuation could pose a headwind in the first half of 2024
McDonald’s is a highly valued stock relative to its restaurant industry peers and the overall market, trading at 25X this year’s earnings forecast and 24X next year. However, this is also a solid return with expected earnings and distribution growth and prospects for accelerating earnings growth later this year.
The 2.25% yield is reliable; McDonald’s is almost a Dividend King, with a payout ratio near 50% and an improving balance sheet. The company still has an equity deficit, but cash has nearly doubled, assets and total assets are increasing, offsetting a slight increase in long-term debt, and the deficit has fallen by more than 20%. The number of shares also fell 1%.
Twenty-eight analysts tracked by Marketbeat pegged the stock at Moderate Buy ahead of the release and were raising price targets. Analysts may now scale back their price targets, but no major change in sentiment is expected.
Technical Outlook: McDonald’s Enters Consolidation
Price action in MCD peaked in mid-2023 and is still ongoing, capping gains. The post-release action sent the market slightly lower, confirming resistance at the critical level and may fall further. However, significant and easily achievable support targets could prevent the price from falling much. These targets include the 150-day EMA and a previous high near $280. If the market breaks down below these levels, a deeper dive could occur. A consolidation pattern should begin assuming the market finds support at or above $280. In this scenario, new highs could be reached by mid-year.
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