It’s Time to Take a Bite of McDonald’s Stock

McDonald’s (NYSE: MCD) appears to be a solid buy as the iconic fast-food chain prepares to report revenue on July 28. The company’s earnings are expected to reflect how deeply the Covid-19 pandemic affected every part of our economy.

According to FactSet, McDonald’s is expected to report earnings per share (EPS) of 74 cents. That’s a 63% drop in profits from the $2.05 EPS the company posted in the same quarter last year. Same-store sales, a key metric are expected to be down 8% in the United States and 20% globally. Part of this reflects the fact that Europe was hit harder at the onset of the pandemic and has been slower to recover.

But to be fair, the earnings report will include the months of April and May which were awful by any measure.  And, like all stocks, that was priced into the stock in March.

The new question is will McDonald’s be able to recapture customers? The early reports on July numbers are encouraging. The firm Longbow Research completed channel checks on McDonald’s store sales and reported the company’s sales had turned positive at the beginning of July.

A blue-chip stock with a recent history of growth

McDonald’s is a blue-chip stock, but it hasn’t done badly for its shareholders in terms of growth. Over the last five years, MCD stock has averaged about 20% growth every year. And despite the market selloff in March, the stock is basically flat as it heads into earnings.

Am I saying the stock is ready to go to $240? No, I think that revenue will remain on the slow side for the remainder of 2020. But it doesn’t seem that unrealistic to believe the stock could hit $220, a 10% upside from its current level.

What about the surge of the novel coronavirus?

When the novel coronavirus first forced millions of Americans indoors, McDonald’s was a big loser. Families were more concerned that they had enough toilet paper and cleaning supplies. And when they did want a break from cooking their own meals, they were likely to order pizza (according to some reports) or support a local family-owned business.

This was particularly difficult for McDonald’s breakfast revenue. Providing a quick and easy breakfast for on-the-go commuters was a profitable revenue stream. But even as the country is getting back to work, the daily commute is not what it used to be.

However, while breakfast revenue is likely to stay suppressed, the company has some catalysts. First, people are taking road trips. It may be underreported, but they are. And when families hit the road, it means that fast food is back in play.

And McDonald’s is doing their part to make sure customers can have a safe, contactless experience. The chain already had kiosks in its restaurants prior to the pandemic. Now, the company is delaying opening its dining room to eat-in customers. And if McDonald’s does begin to allow eat-in customers on August 1, it will mandate that customers wear face coverings.

All of this is to say that unless there is another prolonged and sustained lockdown period in the United States, it appears there McDonald’s will report growing, albeit from March’s low, revenue.

And then there’s the dividend

While many companies have been cutting or suspending dividends, McDonald’s appears to be ready to increase its dividend. If they do, it will make it 44 consecutive years that McDonald’s has raised its dividend.

In the first quarter, the company generated just over $ 1 billion in free cash flow (FCF). The quarterly dividend at current levels is about $900 million. And the company is continuing its stock repurchase program. Both of these bode well not only for the security of the dividend, but that the company will be raising its dividend.

McDonald’s stock is a buy

Since the middle of June, at least 10 analysts have weighed in on McDonald’s and give the fast food chain an upgraded price target. This suggests that they believe the company may report better earnings than expected. If they do, then the stock looks poised to break out over the $200 price level and take another leg up.