Source: PaxForex Premium Analytics Portal, Fundamental Insight
It appears highly likely that a recession will occur this year, given that the nation's real gross domestic product grew at an annual rate of merely 1.1% during the first quarter, a drop from 2.6% in the previous period. Furthermore, as interest rates continue to increase and firms scale back spending, the situation is expected to worsen.
Despite these circumstances, McDonald's may be a company that can withstand the economic downturn. According to its latest earnings report, the fast-food behemoth's sales remained strong despite price increases, indicating robust demand. As a result, even if one is anxious about the impending recession, McDonald's could be an excellent addition to one's investment portfolio this year.
For restaurant stocks, same-store sales is a crucial metric that informs investors about the growth generated by restaurants that have been operational for over a year. This metric is advantageous because it excludes new restaurant openings, providing a more accurate measure of the company's performance.
McDonald's demonstrated impressive same-store sales numbers, with a growth rate of 12.6% during the first quarter of 2023. It's worth noting the improvement from a year ago, where the fast-food giant reported an 11.8% same-store sales growth.
Despite price hikes and tighter budgets affecting consumers, McDonald's continues to display resilient and robust growth. However, as a global business, the company's results have been impacted by unfavorable foreign exchange rates. Nonetheless, with revenue totaling $5.9 billion, a year-over-year increase of 4%, McDonald's showcased strong performance, surpassing its long-run average growth rate.
McDonald's business has demonstrated a consistent track record of being a worthwhile investment, even during times of market struggles. This was evidenced during the Great Recession approximately 15 years ago, where the company performed significantly better than the S&P 500.
During the Great Recession, only a few stocks earned positive returns, but McDonald's was one of them. While the current economic conditions are distinct, the fast-food giant has demonstrated its capacity to endure challenging times, including rising inflation.
While McDonald's stock offers a 2% dividend yield, which is not exceptionally high, it can still enhance investor returns. Therefore, it is a wise decision to consider McDonald's as a potential investment option, given its history of stability and resilience during difficult economic conditions.
One potential drawback of investing in McDonald's is that its shares are trading at a high 31 times earnings, which may seem excessive compared to the S&P 500 average of 19. Additionally, the company has had a lower earnings multiple in recent years.
However, McDonald's has been focused on enhancing its bottom line, as evidenced by its announcement earlier this year to lay off hundreds of staff and reduce pay. In the last quarter, the company incurred a restructuring charge of $180 million, before taxes, in connection with its cost-cutting efforts. Nevertheless, the earnings per share still surged by 66% in Q1 to $2.45.
Furthermore, as the cost-cutting efforts are still in their early stages, there is potential for even greater cost savings to materialize in the future, which could lower the earnings multiple in upcoming quarters. Therefore, while the current earnings multiple may appear high, investors should consider the potential for future cost savings and earnings growth.
McDonald's stock is a promising long-term investment due to the company's ability to attract customers and perform well under diverse economic conditions. Despite its currently high valuation, the stock could still prove to be an excellent buy-and-hold opportunity. As McDonald's continues to grow and prioritize cost-cutting, its financials are expected to improve.
Moreover, the company's dividend offers a reliable source of recurring cash flow for investors to bolster their portfolio returns. In conclusion, McDonald's stock may emerge as one of the most favorable investment options in the event of a recession.
As long as the price is above 290.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 294.96
- Take Profit 1: 299.00
- Take Profit 2: 305.00
Alternative scenario:
If the level of 290.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 290.00
- Take Profit 1: 287.50
- Take Profit 2: 283.50
