Source: PaxForex Premium Analytics Portal, Fundamental Insight
While McDonald's is widely recognized as an icon in the fast food industry, it presents a unique investment opportunity. Although it may lack the high-flying allure of rapidly growing tech stocks, it consistently delivers rising stock prices and often outperforms the S&P 500 index.
However, prospective investors should acquaint themselves with the intricacies of the company and its impact on stock performance. By grasping three key facts about McDonald's stock, potential shareholders can gain a clearer understanding of the investment potential this global giant offers.
- McDonald's Is Not What It Seems
With its extensive network of nearly 41,000 restaurants and renowned brand recognition, it's easy for some investors to categorize McDonald's as merely a restaurant company, similar to Chipotle or the establishments under Restaurant Brands International, such as Burger King.
Yet, upon closer examination, one might be surprised to discover that McDonald's resembles more of a real estate investment trust (REIT) dressed up as a restaurant business. McDonald's actually owns the physical buildings operated by franchisees and collects rental income from these properties. Additionally, the company receives a percentage fee based on sales and an initial fee when a new franchise is established.
These real estate-related activities constitute a significant portion of McDonald's income, tethering its success to the stability of the real estate market. The consistent stream of rental payments also serves as a dependable income source. Furthermore, this unique structure shields McDonald's from the volatility of the restaurant industry, mitigating the impact of industry ups and downs on its overall performance.
- McDonald's Financial Health
In the first half of 2023, McDonald's reported impressive revenue exceeding $12 billion, with a notable 62% originating from its franchise operations. This leaves the remaining 38% attributed to the 5% of restaurants it directly owns.
Interestingly, even though the company-owned restaurants accounted for slightly over half of its total expenses, they contributed only a fraction to its operating income, which amounted to approximately $5.6 billion, primarily driven by its franchised locations.
After accounting for interest, non-operating expenses, and taxes, McDonald's achieved a GAAP net income of $4.1 billion in the first half of the year, marking an impressive 78% surge compared to the same period the previous year.
Investors should be aware that a significant $850 million reduction in other operating expenses substantially bolstered its profitability during this period. It's crucial to note that such a high earnings growth rate may be an exceptional occurrence. Analysts are forecasting non-GAAP net income increases in the high single digits for the current and upcoming year.
Furthermore, McDonald's offers an annual payout of $6.08 per share, resulting in a dividend yield of 2.3%, significantly surpassing the S&P 500's 1.6% yield. Notably, this payout has seen consistent annual increases since 1976, indicating that rising profits are likely to continue fueling further dividend growth.
- McDonald's Presents an Attractive Valuation
In addition to its strong financial performance, McDonald's has also become increasingly appealing from a valuation perspective. Excluding the brief dip in early 2020, its price-to-earnings (P/E) ratio of 24 is close to its five-year lows for this earnings multiple. This valuation places it in a similar range to peers such as Restaurant Brands International and Yum! Brands.
This relatively low P/E ratio enhances McDonald's attractiveness given its consistent dividend growth and steadily rising profits, which have contributed to its outperformance when compared to both the S&P 500 and its industry peers. These compelling results provide investors with solid reasons to closely consider this stock for their portfolios.
McDonald's success can be largely attributed to its astute business strategy. By emphasizing real estate ownership and a franchise-centric model, the company has not only boosted its revenue but also established a significant degree of stability in an often unpredictable industry.
As a result of this strategy, McDonald's has witnessed consistent growth in its revenue, net income, and dividend payments. Coupled with its comparatively low P/E ratio, this makes McDonald's an appealing option for investors seeking opportunities in the restaurant sector or those looking for a reliable source of dividend income.
In summary, McDonald's has effectively leveraged its unique business approach to create a compelling investment proposition, making it a stock worthy of consideration for discerning investors.
As long as the price is below 262.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 254.25
- Take Profit 1: 249.00
- Take Profit 2: 243.00
Alternative scenario:
If the level of 262.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 262.00
- Take Profit 1: 266.00
- Take Profit 2: 270.00
