Source: PaxForex Premium Analytics Portal, Fundamental Insight
Despite the overall decline in the market since early 2022, the stock of McDonald's is reaching new highs this year, and it's not difficult to understand why Wall Street is currently enamored with the Golden Arches. Despite consumers reducing spending in other areas, McDonald's is experiencing an acceleration in sales growth, and its profitability is also reaching new heights.
In this context, let's examine the fast food giant's operational performance in the early part of 2023 and determine if the stock is worth buying, selling, or holding at its current valuation.
McDonald's is dominating a fast-growing fast-food industry with impressive comparable-store sales gains of 13% in both the core U.S. market and global sales footprint in Q1. This places the chain ahead of other rapidly growing competitors like Chipotle and Starbucks. Higher customer traffic and rising menu prices are contributing to the increased spending.
According to management, several positive factors contributed to McDonald's market share growth, but the credit mainly goes to the company's initiatives that have improved customer satisfaction. These initiatives include better staffing levels, training, and quicker order delivery. This is positive news for shareholders as it suggests that the growth is sustainable in the long run, unlike temporary boosts from a popular limited-time menu item. In a press release, CEO Chris Kempczinski emphasized the importance of running excellent restaurants for the company's business momentum.
Despite facing cost pressures, McDonald's has been able to easily offset them with its growth and price increases. The company's operating margin is currently approaching 45% of sales, compared to 15% for both Chipotle and Starbucks in the first quarter. While these peers don't share McDonald's fully franchised operating model, the fast food chain is also outperforming more comparable peers such as Restaurant Brands International, the owner of Burger King and Tim Hortons franchises. This margin expansion is a major factor that has been driving the company's stock to new highs, as it indicates an acceleration in profit growth ahead. In the last quarter, McDonald's earnings rose 19% after adjusting for currency exchange rate shifts.
Despite the broader market's downturn since early 2022, McDonald's stock has been hitting new highs this year. The company has achieved sales growth and increased profitability, thanks to higher customer traffic and rising menu prices. McDonald's has also implemented initiatives that improve customer satisfaction, such as better staffing levels, training, and quicker order delivery. This makes the stock an attractive investment option for shareholders as the gains are sustainable.
However, McDonald's shares are valued at over 9 times annual sales, which is higher than the valuation of most fast-food peers. This high valuation could pose a risk to investors, especially if there is a recession or slowing economic growth ahead. Even though McDonald's is likely to perform well during consumer spending pullbacks, the stock could fall further if the market takes another hit over the next few quarters.
Therefore, McDonald's stock is currently in the "hold" category. Investors should not abandon their bullish thesis, given the higher traffic and profitability. However, they should keep in mind the stock's high valuation and wait for market volatility to produce a more attractive purchase price before investing.
As long as the price is above 285.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 295.75
- Take Profit 1: 300.00
- Take Profit 2: 310.00
Alternative scenario:
If the level of 285.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 285.00
- Take Profit 1: 280.00
- Take Profit 2: 275.00
