McDonald’s Corporation (NYSE: MCD) continues to deliver value to consumers even as the company faces margin pressure at the franchisee level. That’s the key takeaway from a solid earnings report that highlights the fast-food giant’s continued leadership in the sector.
On the earnings call, chief executive officer Chris Kempczinski stated that the company’s goal was to market a brand. The company’s earnings report shows that the McDonald’s brand remains strong. On the top line, the company delivered revenue of $6.5 billion which was 3.2% better than the $6.3 billion that analysts’ expected.
The story on the bottom line was even stronger. The company posted earnings per share of $3.17 which beat the consensus estimate of $2.75 by over 13%. And in a year when many people felt the company was going to face tough comparisons to 2022, the revenue and earnings numbers were 13% and 25% higher on a year-over-year basis.
Now investors will watch to see if the positive results will translate to share price growth. In the week prior to earnings, MCD stock is down 2% and initial reaction to the earnings report is muted.
Prioritizing Value for Its Customers
One reason for lackluster stock price movement could be the continued effect of inflation on the company’s margins. The company reported adjusted operating margin of 47% in the first half and is forecasting full year adjusted operating margin of 46%.
However, McDonald’s is primarily driven by its franchisees. And on the call, it was clear that many of those franchisees continue to deal with the effect of higher producer prices. This illustrates one of the truths of this market. Companies with the size and financial resources to weather the storm can afford to eat more of the producer prices.
That appears to be the case with McDonald’s which continues to be an option for consumers who are looking to trade down. But that may be an oversimplification. The company continues to tweak its menu to appeal to changing tastes, especially with the coveted Gen-Z demographic. To that end, the company introduced six new menu items this summer including many new chicken products.
The Company Continues to Invest in Digital and Technological Platforms
Anyone that’s visited a McDonald’s restaurant either in-store or through the drive-through can see that this isn’t the company of just five years ago. The company’s investment in digital platforms is streamlining the way customers place orders and is creating an opportunity for McDonald’s to “remove the friction” for consumers. In fact, the McDonald’s app is not only maintaining its lead on smartphone adoption, it continues to extend that lead.
This is another way that McDonald’s is staying relevant to a generation that expects the ability to order and pick up their food with minimal human interaction. And it’s clear that McDonald’s will continue to lean into digital platforms in the coming years.
Is MCD Stock a Buy?
That's the question that investors have to consider. At 30x earnings and 26x forward earnings, you can’t say that McDonald’s is a cheap stock. Nevertheless, MCD stock is up 12% in the last 12 months and is trading near its 52-week high.
That could lead many investors to conclude that there’s too much downside risk for the stock. And a dividend with a yield of around 2% may not be enough to excite investors who don’t currently have a position.
However, analyst sentiment remains strong the McDonald’s analyst ratings on MarketBeat give MCD stock a Moderate Buy rating with a $315 price target. And several analysts have price targets that take the stock far higher.
