McDonald’s Earnings Report Disappoints Investors, Presents Buying Opportunity
McDonald’s recent earnings report took a little shine off its stock—and created an opportunity for investors looking to buy shares in the Golden Arches. Long-term, McDonald’s has been a winner. Its shares have returned 15% annualized over the past decade, including reinvested dividends, outpacing the S&P 500’s 13%, and it’s done it with far less volatility. That trajectory was interrupted this week, when the fast-food giant’s fourth-quarter earnings beat expectations but its sales narrowly missed. The stock dropped 3.7%.
McDonald’s Stands Strong Despite Minor Miss in Sales
There’s nothing wrong with the business, however. The company’s earnings report overall revealed business as usual. Even with close to zero growth in the Middle East due to war in the region, total sales grew 8% to $6.41 billion, driven by higher menu prices and only a hair under analysts’ $6.45 billion forecast. Cost inflation, including commodity costs and wages, brought the gross margin lower, but the company was able to spend less on other items, which enabled it to report a profit of $2.95 a share, above estimates of $2.83. The drop was more likely a result of the stock’s 21% gain from its late October low heading into the results.
Digital Sales Could Drive McDonald’s Earnings Growth
McDonald’s long-term opportunity looks strong as well. It might seem difficult for a large company that’s already selling to much of the globe and talking about moderating price increases to grow briskly. But management’s focus on digital sales—think about apps such as Uber Eats and Seamless—allows it to increase revenue from signature products like chicken, burgers, and coffee.
Analysts Project Steady Sales Growth and Increased Profit Margins for McDonald’s
Sales growth could help profits grow at close to 6% if cost inflation is mild and profit margins remain stable. What’s more, McDonald’s says it plans to return all its free cash flow—some $10 billion—to investors in the form of buybacks and dividends, which should help earnings per share grow by nearly 10% to almost $15 by 2026, according to TD Cowen analyst Andrew Charles.
Potential for Multiple Expansion and Future Growth
Earnings alone should move the stock higher, but McDonald’s could also see some multiple expansion. At 23.3 times 12-month forward earnings, it doesn’t look cheap. Still, it trades at just a 15% premium to the S&P 500’s 20.4 times, far below its historical level, buoyed by its brand, its ability to keep growing, and the cash it returns to shareholders. “I give this management team a lot of credit because they know what makes this brand tick,” Charles says. “It’s going to be a good stock.”
Conclusion: McDonald’s Offers Promising Investment Opportunity
Next time you’re at a McDonald’s drive-through, you might want to consider picking up some of their stock, too.
Analyst comment
Heading 1: Negative news – McDonald’s earnings report disappoints investors, stock drops 3.7%. Short-term market reaction may see further decline.
Heading 2: Neutral news – McDonald’s sales narrowly miss, but overall business remains strong. Stock drop likely due to previous gains.
Heading 3: Positive news – McDonald’s focuses on digital sales for future revenue growth. Potential for long-term success.
Heading 4: Positive news – Analysts project steady sales growth and increased profit margins for McDonald’s. Positive outlook for investors.
Heading 5: Positive news – Potential for multiple expansion and future growth. McDonald’s stock could see upward movement.
Heading 6: Positive news – McDonald’s offers promising investment opportunity. Consider investing in the stock.
