Source: PaxForex Premium Analytics Portal, Fundamental Insight
Recently, two renowned food chains, McDonald's and Krispy Kreme, announced a nationwide partnership set to unfold over the coming years.
Under this collaboration, McDonald's will introduce a selection of Krispy Kreme donuts in its restaurants, to enhance foot traffic during breakfast hours. This news sparked a surge in Krispy Kreme's stock. But what about McDonald's? Will its stock experience a similar uptrend?
While this partnership is indeed promising, the financial implications for McDonald's may not align with common expectations. Instead of focusing solely on this collaboration, investors should delve into McDonald's core business operations and its valuation to gauge its investment potential.
Here's what you need to consider:
The partnership was unveiled following a successful trial period involving approximately 160 stores in the Louisville, Kentucky, region. McDonald's plans to introduce Krispy Kreme donuts to all its US locations by 2026, featuring a lineup of three flavors: glazed, frosted, and Kreme-filled. This move is anticipated to drive traffic, particularly during breakfast hours. McDonald's has been highlighting its coffee offerings and has also experimented with extending breakfast hours to 24/7 - an indication of its commitment to expansion in this segment.
While an increase in donut sales will contribute to McDonald's revenue through sales royalties, the overall financial impact of this partnership may be overstated. Firstly, McDonald's derives a significant portion (38%) of its revenue from franchisee rental fees. Secondly, the rollout of Krispy Kreme donuts across all McDonald's stores will be gradual, spanning several years. As such, the financial effects are expected to be marginal in the near term.
In essence, while the McDonald Kreme partnership holds promise, investors should maintain a broader perspective, considering McDonald's fundamental business performance and valuation metrics when making investment decisions.
Investors can appreciate McDonald's willingness to experiment and collaborate to attract consumers, as demonstrated by its recent partnership. While McDonald's has previously teamed up with celebrities to offer limited-edition menu items, this latest collaboration represents a further step in that direction.
Despite shares of McDonald's retracing from their 52-week highs and remaining relatively flat over the past year, determining whether the stock is a buy today is not straightforward. Wall Street values the company's resilient business model and impressive 49-year track record of dividend growth.
Over the past decade, the stock has maintained an average price-to-earnings (P/E) ratio of nearly 26, and it is currently trading at a forward P/E ratio of 23. Despite this discount, the decision to invest in McDonald's is not clear-cut.
When evaluating a stock's valuation, it's crucial to consider growth prospects alongside other metrics. The price/earnings-to-growth (PEG) ratio is a useful tool for this purpose. With a PEG ratio of 3, McDonald's stock still appears expensive relative to its anticipated earnings growth, forecasted to average between 7% and 8% annually over the next three to five years.
The company's balance sheet is another factor that impacts its attractiveness from a valuation standpoint. Despite its discounted valuation compared to historical norms, McDonald's has significantly reduced its share count by over 26% in the past decade through stock repurchases, often financed through borrowing. This has led to a leverage ratio of 2.6 times its earnings before interest, taxes, depreciation, and amortization (EBITDA).
While McDonald's current debt level appears manageable, it may not be sustainable for the company to replicate its past stock repurchase strategies. Consequently, earnings growth may slow in the future, warranting a lower valuation.
Nevertheless, McDonald's remains a solid long-term investment option, suitable for investors seeking stability and steady returns over time. However, those seeking a more favorable entry point may opt to wait for a lower valuation before considering investment.
As long as the price is below 285.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.63
- Take Profit 1: 270.00
- Take Profit 2: 260.00
Alternative scenario:
If the level of 285.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 285.00
- Take Profit 1: 295.00
- Take Profit 2: 305.00
