Source: PaxForex Premium Analytics Portal, Fundamental Insight
McDonald's stock performed well in 2022, overcoming market declines thanks to strong demand in the fast-food industry. The chain enjoyed strong customer traffic in most markets and was largely able to pass on rising costs to higher menu prices.
Currency exchange rates have certainly affected revenues, but the company's huge scale has helped it outpace competitors such as Chipotle.
The coming year, however, will bring other challenges. Some of these will become clear from the company's upcoming earnings report in late January. Given this backdrop, let's see if McDonald's still looks like a worthwhile investment to keep in your portfolio this year.
Last week, McDonald's announced its earnings, which cover the Q4 through the end of 2022. In Q3 comparable-store sales were up 10 percent thanks to increased customer traffic in all sales regions as well as higher prices.
"Our ... performance demonstrated broad business momentum," CEO Chris Kempczinski said in a press release issued in late October. Investors hope to hear similarly positive information in late January.
There were signs of weakness, however. McDonald's U.S. sales growth slowed to 6.1 percent -- less than the 7.6 percent growth achieved by Chipotle during the same period. The two chains are increasingly battling in the drive-thru arena as Chipotle targets growth outside metropolitan areas.
McDonald's stock is likely to continue to deliver solid returns if its finances continue to impress. Like most similar companies, the company's margins shrank last year as prices rose and demand growth slowed. But the chain's franchise-rich network model helped protect revenues. Operating profit margins are still more than 40 percent of sales, compared to 12 percent for Chipotle.
Encouragingly, McDonald's managed to maintain its third-quarter attendance growth while raising prices. If the company can maintain these trends in 2023, there is a good chance that revenues will continue to grow at a solid pace.
Earnings are also helped by the dividend, which was raised for the 46th consecutive year at the end of 2022. Shareholders will receive 10% more payouts in 2023.
Much of this good news is reflected in McDonald's valuation, which is at an all-time high today. You will have to pay nearly nine times your annual sales for the stock, while Chipotle's price is about five times its sales. McDonald's valuation didn't drop much as the market declined last year, while Chipotle was trading at nearly eight times earnings back in 2021.
McDonald's is not as exposed to recessionary risks because of its broader sales reach, focus on value menus, and franchise operations. These factors help explain why the restaurant's stock rose so well in 2022. Business can also grow in boom times, as McDonald's demonstrated after pandemic restrictions were loosened in 2021 and 2022.
Add to that a growing dividend, and you have all the necessary ingredients for a great stock to hold for the long term. McDonald's is very likely to continue gaining market share in a huge global industry and making profits that its smaller peers can only dream of. Consider adding this stock to your portfolio or watch list for 2023.
As long as the price is above 260.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 267.31
- Take Profit 1: 275.00
- Take Profit 2: 280.00
Alternative scenario:
If the level of 260.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 260.00
- Take Profit 1: 256.00
- Take Profit 2: 252.00
