McDonald’s stock: is this bruised future dividend aristocrat a buy?

on Jul 9, 2024
  • McDonald’s share price has crashed by over 17% from the YTD high.
  • Other restaurant companies like Starbucks and Chipotle have also retreated.
  • The company has been relatively resilient over the years.

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The McDonald’s (NYSE: MCD) stock price is nearing a bear market as it crashed by over 17% from its highest point this year. It was trading at $247.85 on Monday, its lowest point since October last year.

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McDonald’s is not the only restaurant company that is underperforming the market. As I wrote earlier on, Starbucks stock has plunged hard in the past few years, costing investors billions of dollars. Luckin Coffee, its big Chinese rival, has lost almost 50% of its value from its 2023 highs. 

The same is happening at Chipotle, where its stock has suffered a harsh reversal and dropped by over 14% from its highest point this year. 

McDonald’s is a great company

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McDonald’s Corporation is one of the biggest restaurant companies globally, where it serves millions of people each year. It has over 40,000 restaurants, with just 5% of them being self-operated. The others are run by independent franchise holders.

McDonald’s has been one of the most beloved stocks in the past few decades, thanks to its consistent revenue and profitability growth. Most importantly, it is a future dividend aristocrat that has boosted its payouts for 22 straight years. 

The company is often seen as an all-weather investment because its business does well in all seasons. For example, its annual revenue came in at $19.2 billion in 2020, down from $21 billion a year earlier. It then rebounded to over $23.2 billion in 2021.

McDonald’s does well because of the constant demand of its meals and its business model that ensures strong margins. It mostly makes its money from its franchise fees and a cut of all orders served in the stores .

As a result, the company’s margins are higher than that of its competitors. It has a gross margin of 57%, an EBIT margin of 45%, and a net income margin of 33%. In contrast, the sector median of the three is 36%, 7.85%, and 4.76%. 

Concerns about growth continue

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The McDonald’s stock price has dived amid concerns about its growth. The most recent result showed that its quarterly revenue rose by 5% to $6.16 billion in the first quarter while its net income jumped by 7% to $1.92 billion. 

Most of this revenue came from its franchised restaurants followed by its company-operated stores. 

It is unclear whether these concerns are warranted since the company is still growing at a modest pace. Analysts expect that its revenue grew by 5.8% in the second quarter to $6.64 billion followed by $6.97 billion in the current quarter.

For the year, analysts expect that its total revenue will jump to over $26.6 billion. Analysts also expect that the McDonald’s stock price will rise from the current $247 to $311.78. 

The company has also become relatively undervalued since its price-to-earnings ratio stands at 21.3 while the forward multiple stands at 20.6. These multiples are lower than the S&P 500’s estimate of 21. 

McDonald’s stock price analysis

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McDonald's stock

MCD chart by TradingView

The daily chart reveals that the MCD share price has tumbled hard in the past few months. This retreat happened after the company formed a head and shoulders pattern, which is a popular bearish sign.

The stock also formed a death cross pattern in April as the 200-day and 50-day moving averages made a bearish crossover. It has now plunged and is hovering above a key level since it has failed to move below in June. 

Therefore, a break below that level will point to more downside, which could see it drop to $241, its lowest level in October last year. This price is about 2.7% below the current level. The key catalyst for McDonald’s stock price will be its earnings, which are scheduled for July 29th.

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