Dropping 8% Year To Date, Will McDonald’s Stock Recover Post Q1 Results?

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MCD: McDonald's logo
MCD
McDonald's

McDonald’s stock (NYSE: MCD), a restaurant chain consisting of more than 40,000 mostly franchised stores, is scheduled to report its fiscal first-quarter results on Tuesday, April 30. We expect MCD stock to likely trade higher with both revenues and earnings beating expectations in Q1 results. The weakening of all major currencies against the U.S. dollar was a major headwind for McDonald’s in FY 2023. However, the menu price increases have been able to offset this significant headwind. 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 was able to grow cash back to $4.6 billion by the end of 2023.

For 2024, McDonald’s expects net restaurant unit expansion will contribute nearly 2% to systemwide sales, and operating margin to be in the mid-to-high 40% range. Capital expenditures will likely be between $2.5B and $2.7B with more than half used to fund restaurant expansion both domestically and internationally. Free cash flow conversion rate is expected to be in the 90% range by the end of 2024. In 2024, the Company plans to open more than 2,100 new restaurants across the globe, which will contribute to nearly 4% new unit growth. Over the long-term, McDonald’s is targeting expansion to 50,000 restaurants by the end of 2027.

MCD stock has shown strong gains of 30% from levels of $215 in early January 2021 to around $277 now, vs. an increase of about 35% 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 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?

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Our forecast indicates that McDonald’s valuation is $301 per share, which is 10% higher than the current market price. Look at our interactive dashboard analysis on McDonald’s Earnings Preview: What To Expect in Fiscal Q1? for more details.

(1) Revenues expected to come in slightly ahead of consensus estimates

Trefis estimates McDonald’s Q1 2024 revenues to be around $6.2 Bil, marginally ahead of the consensus estimate. In Q4 2023, the company’s top line was up 8% year-over-year (y-o-y) at $6.4 billion. It should be noted that its global comparable sales increased by 3.4%, reflecting positive comparable sales across all segments: U.S. increased by 4.3%; the International Operated Markets segment increased by 4.4%; the International Developmental Licensed Markets segment increased by 0.7%. Successful menu and marketing campaigns and continued digital and delivery growth contributed to strong comparable sales results. We forecast McDonald’s Revenues to be $27.1 billion for the fiscal year 2024, up 6% y-o-y.

Due to the Middle East war, the fast-food chain’s systemwide sales have been negatively impacted, primarily in the International Developmental Licenses Markets and Corporate segment. Typically, restaurants in this segment are under a developmental license or affiliate agreement, which involves the company investing no capital and receiving only a royalty on sales. Consequently, the conflict in this region will negatively affect the company’s systemwide sales.

2) EPS is likely to beat consensus estimates marginally

McDonald’s Q1 2024 earnings per share (EPS) is expected to come in at $2.75 per Trefis analysis, slightly higher than the consensus estimate. In Q4, the company’s EPS came in at $2.95 compared to $2.59 a year ago.

(3) Stock price estimate higher than the current market price

Going by our McDonald’s Valuation, an EPS estimate of around $12.46 and a P/E multiple of 24.2x in fiscal 2024, translates into a price of $301, which is almost 10% 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.

Returns Apr 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 MCD Return -3% -8% 124%
 S&P 500 Return -3% 7% 128%
 Trefis Reinforced Value Portfolio -4% 2% 623%

[1] Returns as of 4/29/2024
[2] Cumulative total returns since the end of 2016

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