Editor’s Note
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It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
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Proprietary Data Insights Financial Pros’ Top Restaurant Stock Searches in the Last Month
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Why McDonald’s (MCD) Makes a Great Long-Term Play
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A few of us are old enough to remember the McDonald’s signs that said they proudly served millions of people. Today, it says billions and billions, which is probably an understatement. The home of the Golden Arches has become a staple of American culture and global food. It’s a company known for innovation and adaptation, meeting consumers where they are. Yet, they don’t take their reign lightly. As the company’s latest quarterly results showed, consumers are starting to pull back on spending. Management is now laser-focused on creating value for their customers. And despite the company’s first YoY store sales decline since 2020, financial pros are quite keen on the stock according to our TrackStar data. Their search volume suggests they see short-term pain for the stock but long-term growth. Here’s how that works. McDonald’s Business Golden arches, Big Macs, and fries define McDonald’s global empire, which spans 100 countries in over 40,000 locations and serves millions daily across 40,000+ locations. The company thrives on franchising, with local owners operating 95% of its restaurants. Most of us are familiar with its menu, which includes classic burgers, trendy salads, and its popular McCafé coffee. Innovation keeps McDonald’s ahead in the fast-paced food industry. McDonald’s segments its business into geographies, with the U.S. accounting for 41% of sales, international operated markets accounting for 48%, and the remainder coming from international development licensed markets and corporate. Contracting consumer spending hit sales in Q2 2024, as global sales dipped 1.0%, with lower-income households significantly cutting back. It was the first time since 2020 that same-store sales had been negative year over year. Yet, McDonald’s isn’t flinching. It’s sticking to its 2024 goals, including launching 2,100 new restaurants. To counter economic pressures, the company launched its $5 Meal Deal, with 93% of U.S. restaurants jumping on board. Recently, the company decided to extend the offering to lure back consumers. Financials
Source: Stock Analysis McDonald’s revenue growth relies on delivering fresh, timely ideas that constantly evolve, from digital orders to delivery to improving core products while offering value. The speed of change determines how well the company does from year to year. Average sales growth over the past 3-5 years has ranged from 5%-10%. During this time, the company leveraged technology to improve service and costs, driving margins to some of the best levels in decades. The company has continued to boost its 2.65% dividend payout at roughly 7.8% per year for the last 22 years. It’s similarly spent about $3-$4 billion a year on annual buybacks, yielding around 2.3%-2.7%. Total debt stands at $50.9 billion, down slightly from last year. With $6.3 billion in annual free cash flow, that’s more than enough to cover the debt schedule and return money to shareholders. Valuation
Source: Seeking Alpha Restaurant stocks run a bit expensive as a whole. McDonald’s 22.9x P/E ratio is the lowest next to Starbucks’ (SBUX) 20.7x. Yet, McDonald’s trades at 19.7x cash, which is above Starbucks’ 13.0x but below Chipotle Mexican Grill’s (CMG) 37.2x. Growth
Source: Seeking Alpha McDonald’s average revenue growth is better than Domino’s Pizza (DPZ). However, it’s still the second-lowest of the group. And looking forward, it’s not expecting much for 2024. However, it’s done an excellent job of increasing free cash flow by nearly 10% annually. Profitability
Source: Seeking Alpha When it comes to profitability, no one beats the Golden Arches. McDonald’s margins trounce its peers in every category from top to bottom. Their free cash flow margin is particularly impressive, more than twice as wide as their closest competitors. Our Opinion 7/10 McDonald’s continual innovation keeps them at the forefront of consumer trends and tastes. In the near term, we expect the stock to remain under pressure as consumer spending pulls back. However, the company has an uncanny ability to limit sales declines to just a few quarters. So, while the current year might not look great, we expect the current investments to help boost performance down the road. |
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