McDonald’s stock (NYSE: MCD), a restaurant chain consisting of more than 40,000 mostly franchised stores, is scheduled to report its fiscal third-quarter results on Monday, October 30. We expect MCD stock to likely trade higher with revenues and earnings beating expectations marginally in Q3 results. The weakening of all major currencies against the U.S. dollar has been a major headwind for McDonald’s since last year. However, the menu price increases have been able to offset this significant headwind in the fiscal first half of 2023. It will be interesting to watch if customers start to trim their orders in response to price increases in the upcoming Q3 report. That said, McDonald’s has been able to weather the current economic storm in part by keeping its customer loyalty program, MyMcDonald’s Rewards, going strong since it relaunched in 2021. The company’s rewards program boasted nearly 52 million 90-day active members across its top six markets as of June 30. 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 $1.6 billion as of June 2023.
MCD stock has witnessed gains of 20% from levels of $215 in early January 2021 to around $255 now, vs. an increase of about 10% 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 -3% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 8% in 2023 (YTD) – 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 TM, 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?
Our forecast indicates that McDonald’s valuation is $297 per share, which is almost 15% higher than the current market price. Look at our interactive dashboard analysis on McDonald’s Earnings Preview: What To Expect in Fiscal Q3? for more details.
(1) Revenues expected to be slightly above consensus estimates
Trefis estimates McDonald’s Q3 2023 revenues to be around $6.35 Bil, slightly above the consensus estimate. In Q2 2023, the company’s top line was up 14% year-over-year (y-o-y) at $6.5 billion. It should be noted that its Q2 comparable sales grew by almost 12% globally, with double-digit growth across each segment – thanks to price increases, marketing promotions, and positive guest count. U.S. comparable sales were up 10.3% vs. +9.1% consensus. Successful menu and marketing campaigns and continued digital and delivery growth contributed to strong comparable sales results. Looking ahead, McDonald’s expects to add about 1,500 net restaurants for the year. The restaurant operator guided for a full-year operating margin of around 45%. We forecast McDonald’s Revenues to be $25.4 billion for the fiscal year 2023, up 10% y-o-y.
2) EPS is likely to beat consensus estimates marginally
McDonald’s Q3 2023 earnings per share (EPS) is expected to come in at $2.86 per Trefis analysis, marginally beating the consensus estimate. In Q2, MCD’s consolidated operating income increased 81% y-o-y. These results included $18 million of pre-tax restructuring charges related to the company’s internal effort to modernize ways of working (Accelerating the Organization). The company’s net income was $2.3 billion, or $3.15 per share vs. $1.2 billion a year ago or $1.60 per share.
(3) Stock price estimate higher than the current market price
Going by our McDonald’s Valuation, an EPS estimate of around $11.58 and a P/E multiple of 25.7x in fiscal 2023, translates into a price of $297, which is almost 15% higher than the current market price.
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.
|S&P 500 Return||-3%||8%||85%|
|Trefis Reinforced Value Portfolio||-5%||17%||501%|
 Month-to-date and year-to-date as of 10/27/2023
 Cumulative total returns since the end of 2016