McDonald’s stock serves up a buy-the-dip opportunity

Key Points

• McDonald's had a mixed quarter, but top-line weakness is negligible, and margins shined. 
• The Mid-East war is weighing on growth in developing markets, but comps are still solid everywhere else. 
• The stock may pull back 5% to 10%, setting up another buying opportunity with accelerating growth expected by year's end. 

McDonald’s NYSE: MCD had a solid quarter, but headwinds cut into the top line and will persist for the foreseeable future. The headwinds include war in the Middle East and consumer pull-back in the US, but that is the worst news. Headwinds aside, the company continues to grow and gain leverage within existing and new markets, providing a lever for growth later in the year. 

The Mid-East war is unpredictable; it could linger for years, but the FOMC is expected to cut rates later this year and ease pressure on consumer spending dollars. Between then and now, shares of MCD may pull back to more significant support levels and open up a buy-the-dip opportunity for investors. 

McDonald’s growth slows, but margin widens

McDonald’s Q4 is mixed relative to the Marketbeat.com analysts' estimates, but the top-line weakness is negligible in light of the bottom-line strengths. The $6.41 billion in revenue is up 8.1% compared to last year, aided by a 2% FX tailwind, but missed the consensus by $0.040 billion or 60 basis points. Comps were up 3.4% globally, led by a 4.4% gain in International Operated Markets and a 4.3% gain in the US. US comps were slightly short of expectations and attributed to a pullback in spending by lower-income customers.

Margin news is favorable to shareholders. The GAAP margin contracted slightly due to restructuring and repositioning efforts, but less than expected, and share repurchases helped the bottom line. The GAAP EPS grew by 8%, aligning with the top-line performance, with adjusted earnings up 14%. The adjusted $2.95 is also $0.12 better than forecasted, and margin strength should carry into the first half of 2024. 

McDonald’s didn’t give guidance, but factors suggest another year of solid, if slowing, growth in 2024. Among them are plans to open another 2100 locations, the lean into burger quality, and CosMc. The new locations are expected to drive at least 2% top-line growth. They will aid margin over time, while the minor tweaks to burger preparation will increase overall satisfaction, loyalty and return visits. Loyalty sales are a significant source of traffic for the company and are up 45% in Q4. 

The CosMc concept is still in its early development phase, but the single location appears to be doing very well. Up to ten more CosMc locations are expected by year-end; they won’t move the needle regarding 2024 results but could alter the long-term outlook significantly. 

McDonald’s valuation may be a headwind in H1 2024

McDonald’s is a highly valued stock relative to its peers in the restaurant industry and the broader market, trading at 25X this year’s and 24X next year’s earnings outlook. However, it is also a reliable yield with expected earnings and distribution growth and an outlook for accelerating earnings growth by year-end. 

The 2.25% yield is reliable; McDonald’s is a near-Dividend King, with a payout ratio near 50% and an improving balance sheet. The company is still running a shareholder deficit, but cash is almost double, assets and total assets are up, offsetting a slight increase in long-term debt, and the deficit is down more than 20%. The share count is also down 1%. 

The twenty-eight analysts tracked by Marketbeat pegged the stock at Moderate Buy before the release and were raising price targets. The analysts may trim their price targets now, but a major shift in sentiment is not expected.

The technical outlook: McDonald’s enters consolidation

The price action in MCD hit a peak in mid-2023, and it is still in place, capping gains. The post-release action has the market down slightly, confirming resistance at the critical level and may fall further. However, significant support targets within easy reach may keep the price from falling far. Those targets include the 150-day EMA and a previous high near $280. If the market falls below those levels, a deeper dive may come. A consolidation pattern should begin assuming the market finds support at or above $280. In this scenario, new highs may be reached by mid-year.