This is why investors are loving McDonald’s stock

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You have probably heard McDonald’s famous “I’m Lovin’ It” slogan. Well, it turns out that it does not work only for its clients but for its shareholders as well. McDonald’s stock keeps soaring higher and higher as they continue to increase their revenues and earnings at a rapid pace. 

What’s their secret recipe? It’s their unbeatable mix of affordable offerings that keep customers hooked combined with their constant search for new locations, including their latest beverage-led concept, CosMc’s, that promise to keep their growth momentum sustained. 

McDonald’s growth seems to remain

It is truly impressive to see McDonald’s consistently achieve double-digit revenue growth without any signs of slowing down. Despite being in business for many years, one would expect that most of their locations would have already reached their sales potential. 

However, McDonald’s has been able to maintain growth by implementing clever sales strategies, such as incentivizing participation in their loyalty program. 

Additionally, the company has focused on digital ordering to provide faster service and has kept prices competitive in an inflationary environment, resulting in continuous growth in same-store sales.

For instance, throughout Q4, McDonald’s in Canada maintained its popular bundle of McMuffin and hot coffee, which proved to be a compelling option for many during the crucial morning hours. Consequently, McDonald’s witnessed noticeable gains in its breakfast market share. 

The fast-food giant also promoted in-app orders and highlighted the benefits of the “Ready on Arrival” feature, which resulted in a reduction of 60 seconds in wait times for curbside pickups across the nation.

The successful implementation of these initiatives, coupled with McDonald’s affordable menu prices compared to other dining options, helped drive a 9% increase in same-store sales growth during Fiscal 2023.

Additionally, McDonald’s also opened 1,547 restaurants during the year, bringing its total number of locations to 41,822, and this resulted in a 10% increase in total revenues for the year, bringing it to $25.5 billion.

Operating margins and record profits

McDonald’s business model is brilliant because it has the ability to increase its profits at a faster rate than its sales, thanks to its royalty-based structure. The company makes most of its money from the royalties and rent paid by its franchises, with an astonishing 95% of its locations operating under franchise agreements. 

As sales in existing locations increase, McDonald’s collects higher royalties with no additional expenses, leading to an expansion of profit margins over time. This helps the company achieve a bottom-line growth that outpaces its revenue growth. 

In FY2023, McDonald’s operating profit margin set a new record of 45.9%, a growth from last year’s 44.6%, resulting in a 37% surge in the company’s net income to $8.47 billion. McDonald’s also benefited from buybacks, which increased EPS by 39% to a record $11.56.

A little bump on the road

Last Friday, technology outages occurred at McDonald’s locations in the U.K., Australia, New Zealand, and Japan. This reportedly caused customers to only be able to pay with cash, while employees had to take orders on paper, and some locations had to suspend operations. 

Despite this, the fast food giant assured the public that the issue was not related to a cyberattack and that it was working to resolve the problem. 

Before the market opened, MCD was down 0.4% at $280.50, which marked its third-straight daily drop. The stock slipped below its 100-day moving average and is currently trading at its lowest level since late November, distancing itself from an all-time high of $302.39 that was achieved on Jan. 22. Year-to-date, shares have a deficit of roughly 5%.

Causes of growth justify the stock valuation

McDonald’s is expected to experience robust revenue and earnings growth due to its strong growth catalysts, despite occasional setbacks. The company plans to expand its global footprint and aims to have 50,000 restaurants by 2027, which is faster than the current pace of openings. 

Additionally, McDonald’s has identified a $100 billion market opportunity in beverage-led experiences across its top six markets, where its core business typically under indexes. To capitalize on this opportunity, McDonald’s opened a pilot CosMc’s restaurant in less than a year, which generated significant buzz.

This single location in Bolingbrook is the first of 10 planned stores. While the initial contribution to revenues may be minimal, this move presents an opportunity for McDonald’s to establish a new brand in the beverage space, and potentially develop a large franchise with thousands of locations. This new initiative could provide a significant long-term sales growth boost to McDonald’s core brand. 

As a result, despite the prolonged rally in McDonald’s share price, the stock’s bullish momentum is likely to continue. McDonald’s forward P/E of 22.7 seems to be justified, given the company’s earnings growth and future growth catalysts.

Should you buy McDonald’s stock?

McDonald’s is continuing to achieve impressive double-digit revenue growth, alongside record operating margins and earnings. By implementing strategies such as digital ordering, menu bundling, and maintaining affordable prices, the company has been able to sustain an increase in foot traffic in its stores and has even managed to capture market share in some categories. 

The management’s plan to expand to 50,000 locations by 2027, as well as the potential for CosMc’s to become a big franchise opportunity for McDonald’s, are expected to further boost its financials. As a result, chances are the stock’s bullish sentiment is likely to continue, despite the company’s recent system inconvenience. 

Looking at the stock’s rating on Wall Street, there is a Moderate Buy consensus rating. According to the average MCD stock forecast of $323.24, there is a potential upside of 14.3%.

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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)

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