McDonald’s Stock Up 16% Over Last Year, Can It Grow More?
After a 16% growth over the last twelve months, at the current price of around $263 per share, we believe McDonald’s (NYSE: MCD), the world’s largest restaurant chain, consisting of more than 40,000 mostly franchised stores – is fairly priced. MCD stock has increased from around $226 to $263 in the last twelve months, largely outperforming the broader indices, with the S&P falling about 8% over the same period. MCD’s stock gains can be attributed to its ability to perform in challenging economic environments, driven by an aggressive push into the digital and home-delivery niches, in addition to higher cash in hand.
In 2022, the company’s top line was flat year-over-year (y-o-y) at $23.2 billion and earnings per share fell 17% y-o-y to $8.33. The weakening of all major currencies against the U.S. dollar was a major headwind for McDonald’s all year in 2022. Its operating profit margin also dropped from the near 45% rate the company set a year earlier, to the current 40% in fiscal 2022 – thanks to rising costs. That said, MCD also warned that commodity, utility, and labor inflation could likely continue to be a drag on margins in 2023 as well.
It should be noted that MCD’s full-year 2022 comparable sales grew by over 10%, and comparable guest counts grew by 5% – thanks to more customer visits, price increases, and marketing promotions. Successful menu and marketing campaigns, such as the Cactus Plant Flea Market promotion and McRib, and continued digital and delivery growth contributed to strong comparable sales results. McDonald’s has been able to weather the economic storm in part by keeping its customer loyalty program, MyMcDonald’s Rewards, going strong since it relaunched in 2021. Its membership stands at 28 million in the U.S. Also, McDonald’s franchises typically don’t own the building. These franchises agree to rent their stores from the parent company, giving them extra income in addition to franchise fees and other royalties. During the pandemic, the company accumulated cash reserves to prepare for recessions, going from cash holdings of $898 million in 2019 to $4.7 billion cash on hand by 2021. The company invested much of that cash in the drive-thru and delivery services and still has plenty of cash sitting at $2.6 billion as of December 2022.
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We forecast McDonald’s Revenues to be $23 billion for the fiscal year 2023, down marginally y-o-y. Looking at the bottom line, we now forecast EPS to come in at 10.60. Given the changes to our revenues and earnings forecast, we have revised our McDonald’s Valuation to $266 per share, based on $10.60 expected EPS and a 25.1x P/E multiple for the fiscal year 2023 – almost in line with the current market price.
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| Returns | Mar 2023 MTD [1] |
2023 YTD [1] |
2017-23 Total [2] |
| MCD Return | 0% | 0% | 116% |
| S&P 500 Return | -3% | 0% | 72% |
| Trefis Multi-Strategy Portfolio | -5% | 2% | 221% |
[1] Month-to-date and year-to-date as of 3/14/2023
[2] Cumulative total returns since the end of 2016
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