Source: PaxForex Premium Analytics Portal, Fundamental Insight
The slowdown in the U.S. market has failed to stop the positive global momentum for McDonald's. That was the main takeaway from the fast-food giant's recent earnings report, which covers sales through the end of June.
Of course, the company faced some serious challenges during this period. These include rising costs and increased inflationary pressures on consumer spending. However, the chain's report suggested that McDonald's could easily deal with this volatile sales situation without much loss for investors.
Let's take a closer look.
McDonald's sales trends didn't miss a beat. Although reported revenues were down 3 percent, the decline was due solely to currency fluctuations. After accounting for these fluctuations, revenues were up 3%. Comparable store sales, the chain's main measure of growth, were up 10%, showing a slight slowdown from the 12% growth in the previous quarter.
The U.S. market was the weakest of the major geographic regions, with sales up less than 4%. However, sales momentum improved there, increasing by less than a full percentage point. McDonald's executives cited success in customer service and mobile ordering as a key competitive advantage. "By focusing on our customers and team through rapidly growing digital capabilities," CEO Chris Kempczinski said in a press release, "we delivered global ... growth of nearly 10 percent."
McDonald's earnings results show why many investors have flocked to this recession-resistant stock. Earnings at the restaurant level were up 8% after accounting for currency movements. The fast-food giant's adjusted operating margin rose to a market-leading 44% on sales, up from 43% on sales a year earlier.
Company executives said inflation -- including higher prices for materials, labor, and transportation -- was more than offset by higher sales and higher prices. Cash flow was also strong, suggesting that McDonald's will have no problem increasing its dividend again in 2023.
McDonald's does not publish short-term sales guidance, but its comments about the remainder of 2022 should allay the fears of many investors. Operating profit margins should be in the mid-40s, company executives confirmed, despite accelerating inflation.
The chain is pouring money into upgrades, including updating U.S. stores so they can better handle the growing demand for delivery and service. McDonald's success here helps explain why McDonald's is wresting market share from peers like Starbucks, and management is ready to double down on its growth strategy.
Of course, there are serious risks for the company, including the prospect of slower economic growth worldwide. A recession typically doesn't hit the fast-food industry hard, but in the short term, it is likely to affect sales and earnings momentum.
In the meantime, investors need not worry that McDonald's could lose its edge as the world emerges from the pandemic. This year, sales will be up about 10 percent after skyrocketing in 2021, and operating profit margins are still more than 40 percent of sales.
These factors, as well as a growing dividend, should make investors optimistic about this growing business, despite the volatility in consumer spending at the moment. The stock looks even more attractive, given that its price has declined slightly since early 2022.
As long as the price is above the 257.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 260.86
- Take Profit 1: 265.00
- Take Profit 2: 270.00
Alternative scenario:
If the level of 257.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 257.00
- Take Profit 1: 252.00
- Take Profit 2: 248.00
