Down 12% This Year, What’s Happening With McDonald’s Stock?

After a 12% decline year-to-date, at the current price of around $260 per share, we believe McDonald’s (NYSE: MCD), the world’s largest restaurant chain, consisting of more than 40,000 mostly franchised stores – has likely limited near-term gains. MCD stock has declined from around $297 to $260 so far this year, largely underperforming the broader indices, with the S&P growing about 17% over the same period. In comparison, MCD’s peer Restaurant Brands International Inc. stock (NYSE: QSR) fell 4% to $75 during the same period. MCD’s stock decline can be attributed to investors’ concern about rising costs. Price increases have been a key part of the company’s strategy and a way to offset inflation costs. But it may not be able to do that without impacting overall demand. On its Q1 conference call, the company signaled that consumers have begun to push back due to the continued menu price increases. McDonald’s has a larger proportion of lower-income customers so pricing power could be an issue in the future. The company faces headwinds from across all its major markets (namely the U.S., the U.K., Australia, Germany, Canada, and Japan) regarding slowing traffic. In fact, the company expects the quick-service restaurant industry traffic in the U.S. to be negative for the full year 2024. Right now, there are warning signs that should not be overlooked. But over the longer term, the company could be a solid chance due to its aggressive push into the digital and home-delivery niches, higher cash in hand, and its ability to perform in challenging economic environments and maintain culturally relevant menus around the world (like India). It should be noted that MCD shares are trading at a valuation of 22x forward price-to-earnings ratio which is similar to Yum! Brands (NYSE: YUM) and Starbucks (NASDAQ: SBUX). MCD’s current P/E ratio is below the five-year average of 28x, indicating that the stock could move higher again in the long term.

MCD stock has shown strong gains of 20% from levels of $215 in early January 2021 to around $260 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in MCD stock has been far from consistent. Returns for the stock were 25% in 2021, -2% in 2022, and 13% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MCD underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MCD face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

In Q1, McDonald’s revenue grew 5% y-o-y to $6.2 billion, based on a 2% growth in global comparable sales. While that is not a huge jump, it marked the company’s 13th straight quarter of global same-store growth and came against a difficult y-o-y comparison of 12.6% a year ago. Comp sales were driven by a rise in U.S. sales of 2.5%, a 2.7% rise in International Operated Markets, and a mere 0.2% decline in International Developmental Licensed Markets (after boycotts in the Middle East weighed on traffic). In addition, McDonald’s adjusted bottom line grew 2% y-o-y to $2.70. Looking ahead, MCD expects 2024 capital expenditures to be between $2.5 billion and $2.7 billion, more than half of which will be directed toward new restaurant unit expansion across the U.S. and International Operated Markets.

MCD stock is an excellent source of inflation-resistant income. 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. In Q1 2024, around 38% of the company revenue came from sales at company-owned restaurants. Those sales come from about 5% of McDonald’s restaurants owned by the company. The remaining 95% of restaurants are franchises.

It is helpful to see how its peers stack up. MCD Peers shows how McDonald’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/19/2024
[2] Cumulative total returns since the end of 2016