This restaurant stock is holding up despite rising inflation. Is it still a purchase?

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After only a 3% decline over the past six months, at the current price of approximately $248 per share, we believe McDonald’s (NYSE:MCD), the world’s largest restaurant chain, made up of more than 40,000 mostly franchised stores, could post gains. MCD stock has fallen from around $256 to $248 in the past six months, significantly outperforming broader indices, with the S&P falling around 11% over the same period. The decline in MCD shares can be attributed to investor concerns about rising costs and their effect on the company’s bottom line. It should be noted that MCD shares are still trading at a higher valuation of 27 times the forward price-to-earnings ratio, despite the recent sell-off. This compares to a P/E ratio of 22x for Yum! Brands (NYSE: YUM) and 21x for Starbucks (NYSE: SBUX). McDonald’s premium is justified by rising revenue and profitability, driven by popular menu items and an aggressive push into digital and home delivery niches, in addition to higher cash flow. Its advantage lies in the company’s ability to perform in tough economic environments and maintain culturally relevant menus around the world (eg India).

In the first quarter, McDonald’s revenue increased 11% year-over-year to $5.7 billion, driven by 12% growth in worldwide comparable sales. Gains were strong internationally, helping lift a somewhat modest US sales increase of 3.5%. However, McDonald’s net income fell 28% year-on-year to $1.48, due to one-time charges related to taxes and the suspension of operations in Russia and Ukraine. After taking these factors into account, adjusted earnings of $2.28 per share were up 19% from prior year levels. It should be noted that Russia accounts for almost 9% of the company’s total turnover.

In the highly competitive restaurant industry, how does McDonald’s stand out?

  • Digital sales, which includes mobile orders, in-store kiosk orders and delivery, now account for 30% of total sales, a 60% year-over-year gain in the first quarter. The percentage of McDonald’s restaurants offering delivery increased from 65% in Q1 2019 to 80% in Q1 2022. Additionally, digital sales in McDonald’s six major markets accounted for more than 30% of system-wide sales , compared to 20% in 2020.
  • Price increases accounted for most of the offsetting gains in the first quarter, which averaged 8% for the period – a big increase in normal times, but a relatively modest jump considering the 8.5 jumps % and 8.3% of the consumer price index during the months of March. and April, respectively.
  • McDonald’s has been able to weather the economic storm in part by keeping its customer loyalty program, MyMcDonald’s Rewards, strong since relaunching it last year and seeing its membership grow to 26 million. McDonald’s has long had a loyal customer base, but its digital initiatives have helped it generate more loyalty.
  • During the pandemic, the company has built up cash reserves to prepare for recessions, growing from $898 million in 2019 to $4.7 billion in cash by 2021. The company has invested a large portion of that money in drive-thru and delivery services and still has plenty of cash at $2.3 billion in March 2022.
  • McDonald’s franchises generally do not own the building. These franchisees agree to lease their stores to the parent company, which provides it with additional income on top of franchise fees and other royalties.

We updated our model after the Q1 release. We plan McDonald’s revenue to $23.6 billion in fiscal 2022, up 2% year-over-year. On the bottom line, we now expect EPS to come in at 9.91. In light of changes to our revenue and earnings guidance, we have revised our McDonald’s Rating at $264 per share, based on expected EPS of $9.91 and a P/E multiple of 26.7x for fiscal year 2022, nearly 6% above the current market price . That said, the company’s shares look cheap at the current price.

The fast-food giant does not provide short-term growth forecasts, and the coming quarters could show high volatility given the current macroeconomic situation. Going forward, if current inflationary pressures continue to persist, broader markets are likely to see lower levels in the near term. And, a further decline in MCD stock can be used as a buying opportunity for better long-term gains.

Here you will find our previous coverage of MCD stock where you can follow our view over time.

Although MCD stock looks set to generate more gains in the future, it is worth seeing how its peers stack up. Find out how McDonald’s peers price on the measures that matter. You can find other useful comparisons for companies in all industries on Peer Comparisons.

With stock prices falling precipitously across all sectors, we may be heading into a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’

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