Source: PaxForex Premium Analytics Portal, Fundamental Insight
McDonald's, known for its affordable fast food, currently has a stock that is anything but inexpensive. Despite major indexes still being below their late-2021 peaks, McDonald's shares are trading near all-time highs.
However, upon closer examination, this impressive surge in the market value of the company is understandable. McDonald's has been delivering exceptional growth metrics and witnessing an expansion of profit margins, reaching new records. Considering these factors, let's explore a few reasons why investing in this stock remains a favorable choice despite its currently elevated valuation.
In recent times, the restaurant and fast-food industry has experienced a prosperous period as consumers redirected their spending towards more experiential endeavors and away from several product categories that were popular during the pandemic. Even within this thriving sector, McDonald's stands out with its remarkable performance.
In the first quarter, McDonald's witnessed a significant 13% increase in sales across all its geographic categories, including the U.S. In comparison, Chipotle Mexican Grill achieved an 11% growth during the same period. McDonald's success can be attributed to a combination of higher customer footfall and increased average spending.
This remarkable performance was fueled, in part, by enhancements in crucial areas such as order time and customer satisfaction. CEO Chris Kempczinski highlighted the importance of operating exceptional restaurants, stating, "Running great restaurants is fundamental to our business momentum," in a press release.
Furthermore, McDonald's outshines its competitors in terms of financial performance. Despite initial skepticism regarding the company's ability to improve its operating profit margin, which had already exceeded 40% due to its refranchising strategy, the past year has proven that McDonald's is capable of setting new records in this aspect.
The rising profit margin of McDonald's can be attributed to a combination of factors, including rapid sales growth, higher prices, and a decrease in expense inflation. Moreover, investors benefit from a solid dividend, which further enhances their returns. In late 2022, McDonald's increased its dividend payout by 10%, resulting in a yield slightly above 2%. This yield is only marginally lower than the dividend yield of Restaurant Brands International, the owner of Burger King.
Naturally, investors are required to pay a premium for these competitive advantages. McDonald's shares are currently priced at approximately 9 times annual sales, while Chipotle has a price-to-sales ratio of 6 and Restaurant Brands International has a ratio of 5.
Nevertheless, the higher price is justified. Apart from displaying exceptional growth and profit metrics during prosperous periods like the current expansion cycle, McDonald's stock has the potential to generate substantial returns even when consumer spending levels decline. The company has proven its ability to offer both premium products and options that cater to value-conscious shoppers. Furthermore, McDonald's extensive sales reach and high profit margins provide protection to shareholders against severe operating downturns that could impact smaller competitors.
While there is a possibility that McDonald's stock may become more affordable in the coming quarters, particularly if the overall market experiences a decline, investors need not wait for such a potential downturn. The fast-food giant has earned its premium valuation and is poised to deliver satisfying returns to patient shareholders who choose to buy the stock now and hold it for several years, at the very least.
As long as the price is above 280.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 289.78
- Take Profit 1: 297.00
- Take Profit 2: 305.00
Alternative scenario:
If the level of 280.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 280.00
- Take Profit 1: 275.00
- Take Profit 2: 270.00
