McDonald’s Trend Following Signal is an Opportunity Today

Key Points

• McDonald's had a solid Q1 despite missing analysts' estimates. 
• Headwinds exist that will impact revenue and profitability this year.
• Analysts' coverage is broad and leading the market to a new high. 

McDonald’s Corporation NYSE: MCD share price is down from its peak, but this is good news for investors. The trend in MCD stock is up, and the move to retest support at the long-term EMA is a budding trend-following entry supported by results. McDonald’s Q1 results were lackluster relative to the analysts’ forecasts, but slowing growth was expected, and the impact of the Middle East war was less than it could have been. 

Despite the headwinds, the company produced growth and sustained margins and continues to position itself for long-term success. The Accelerating the Arches plan is helping this consumer discretionary company gain market share and leverage for the next few years of growth. 

McDonald’s Mixed Results Are No Reason to Sell Stock

McDonald’s reported mixed results relative to the consensus figures reported by Marketbeat.com. The $6.17 billion in revenue is as expected, which is no catalyst for a rally and is compounded by weaker-than-expected earnings. However, despite the weakness, the company grew by 4.6% compared to last year, and the bottom line miss was small. 

Systemwide restaurant sales grew by 3% on an FX-neutral basis. Comps are up 1.9% and the 13th quarter of YOY growth; comps are up 30% compared to Q1 2020, the last quarter before the impact of the COVID-19 pandemic. Internationally operated markets were the strongest segmentally, at 2.7%, followed by a 2.5% gain in the US—pricing, mix, and traffic support sales in the US and IO markets. Internationally developed markets were weakest at -0.2% as the impact of war continued. 

Margin news is good. The GAAP and adjusted margin were solid compared to last year, leaving earnings up on a YOY basis. GAAP earnings grew at a high single-digit pace while adjusted grew by 2%. The 2% growth lags the top line and fell short of the consensus by $0.03 but does little to alter the outlook for full-year earnings or capital returns. The company’s strongest quarters are still ahead, and trends in the core business units remain positive. 

McDonald’s is on the Value Menu for Income Investors

McDonald’s dividend strength is seen in its results and dividend history. The company is a Dividend Aristocrat verging on King with a high 2.45% yield and a low 50% payout ratio. The yield is running at the high end of the historical range, and the valuation is low, suggesting a deep-value opportunity in this desirable name. The stock has traded at an average of 25X earnings over the last ten years, with a high above 30X. It is currently near 23X, below average, and analysts indicate a higher stock price. 

Analysts' coverage of MCD is broad. There are twenty-seven analysts with a current rating on MCD, and they peg the stock at Moderate Buy. That rating has been firm and steady for at least twelve months and is unlikely to change. The consensus target is up compared to last year, steady ahead of the report, and indicates a 16% upside relative to the pre-release price action. 

The Technical Outlook: McDonald’s Fall to Critical Support

McDonald’s is in an uptrend, which will likely continue, but the market is at a critical turning point. The stock is down in premarket trading, sitting just above critical support at the long-term EMA, and it may move lower. The question is whether or not the EMA will produce a rebound. If so, the market for MCD should resume the uptrend soon. If not, this stock could fall below critical support and move as low as the $245 region. If a rebound forms, the critical resistance point is near $275, $280, and $300. A move above $300 to the consensus $318 would be bullish, set an all-time high, and open the door to another $50 upside.