Up 10% In 2020, Does McDonald’s Stock Have More Upside?

After a 10% rise this year, at the current price near $215 per share, we believe McDonald’s stock (NYSE: MCD) has a moderate upside in the near term. MCD stock has increased from $197 to $218 since the start of the year compared to the S&P 500 which also increased by 10% in 2020. The stock has performed in line with the market despite a fall in revenues for the first 2 quarters of 2020. For Q3 2020 revenue were nearly flat at $5.4 billion while earnings improved to $2.37 compared to $2.13 in the same period of the previous year. Revenue and earnings recovery were driven by a 4.6% growth in systemwide sales in the US. We expect systemwide sales to continue recovery in Q4 2020 and the stock price to rise along with it.

The company has seen earnings grow over the recent years, while its P/E multiple has also fallen. We believe the stock is likely to continue growing in the near term. Our dashboard Buy Or Sell McDonald’s Stock? provides the key numbers behind our thinking.

The 27% rise in MCD stock price between 2017 to 2019 is justified by significant growth in earnings during those two years. McDonald’s revenue fell 7.6% from $22.8 billion in 2017 to $21.1 billion in 2019. This effect was offset by margins increasing from 22.8% to 28.6% during this period. On a per share basis, earnings went up from $6.43 to $7.95. Higher margins were driven by an overall increase in restaurants and continuous re-franchising.

During the same period, the P/E multiple fell from 27x to 25x. The P/E improved in recent weeks as the company and sector are showing signs of recovery. Currently the multiple stands at 27x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. McDonald’s revenues and earnings took a hit for the first half of 2020, but in Q3 2020 reported flat revenue and a growth in earnings compared to the same period in 2019. Q3 2020 also saw systemwide sales recover (up 4.6% y-o-y) in the US market compared to Q2 2020 where we saw a huge decline due to lockdowns affected across regions.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. As per McDonald’s valuation by Trefis, we have a price estimate of $238 per share for MCD’s stock, reflecting a 10% potential rise from its current level.

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