McDonald’s Stock Falling Below $100 Is A Real Possibility

by Trefis Team
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McDonald’s (NYSE: MCD) stock tanked from nearly $230 in early February to a multi-year low of $124 a month ago as the spread of the novel Coronavirus rattled the stock markets and the broader economy. However, McDonald’s stock has rallied to around $180 over recent weeks and outperformed the S&P 500 thus far through the crisis despite fears that the economy could slip into a recession and with the coronavirus pandemic forcing it to keep its restaurants closed or to operate them in a takeout-only mode. We estimate that McDonald’s stock price could decline to levels of around $100 if its revenues fall by 20% vs. FY’19, its margins contract to 22.9% (as it continues paying its staff when the restaurants are closed), and its valuation multiple falls to levels of around 20x from almost 25x at the end of FY’19. Below, we summarize this possible downside case for McDonald’s, which is detailed in our interactive dashboard analysis, How Low Can McDonald’s Stock Go?.

 

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant that many restaurants are closed, while some are running in a takeout-only mode. The company is also paying some of its staff where the restaurants had to be closed, which will weigh on the net income margin. We believe McDonald’s Q1 results in April will confirm the hit to its revenue and margins. It is also likely to accompany a lower Q2 as-well-as full-year 2020 guidance. 

Specifically, we believe the full-year revenue expectations formed by the market at the time of April’s Q1 results may be closer to $16.9 billion – about 26% lower than its 2017 revenue of $22.8 billion, and 20% lower than the 2019 revenue of $21.1 billion. To put things in perspective, a 20% decline in revenues from the level seen in 2019 implies:

A) 80% reduction in average monthly revenues over 3 months,
B) 50% reduction in average monthly revenues over 5 months, or
C) 35% reduction in average monthly revenues over 7 months,

Considering how crippling the global outbreak has been for the restaurant business, options A, B as well as C are quite possible. A separate dashboard shows key components of McDonald’s revenues.

The market isn’t going to stomach such a steeper-than-expected decline in revenue well, and McDonald’s P/E is likely to shrink by about 14% from the current 23.4x to 20x. Trefis also estimates that the margins will likely drop from 30% in 2019 to 22.9% in 2020, this would mean a double whammy of 36% lower earnings and 14% lower P/E multiple, translating into McDonald’s price drop of over 46%, to about $100 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. That said, the actual recovery and its timing hinges on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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