It’s not like there was much uncertainty about whether or not McDonald’s Corporation (NYSE:MCD) would be inflation and recession-proof stock, but yesterday’s earnings report pretty much confirmed it. The home of the Big Mac came in a bit light on revenue but topped analyst expectations for its bottom line earnings. Global comparable sales increased 9.7%, reflecting positive comparable sales across all segments, with the US alone increasing 3.7%. Further afield, a double-digit bounce was seen in sales across internationally operated markets. “Strategic menu price increases” were credited with carrying profits above expectations, and the results were enough to send shares up close to 3% on the day.
Considering the benchmark S&P 500 index finished down more than 1%, it’s clear Wall Street is a fan of the numbers. CEO Chris Kempczinski struck a mostly bullish tone with the report, saying
"The McDonald's (NYSE:MCD) System continues to demonstrate strength and resiliency. Our second quarter performance reflects outstanding execution against our Accelerating the Arches strategy. By focusing on our customers and crew, enabled by a rapidly growing digital capability, we delivered global comparable sales growth of nearly 10%. Nonetheless, the operating environment across the competitive landscape remains challenging. While we are planning for a wide range of scenarios, I am confident that our plans and people position McDonald's to weather this environment better than others."
Fortress Stock
The headwinds he was referring to must be acknowledged by anyone considering getting involved. It is true that competition remains robust and that economic concerns are likely to continue impacting the fast-food chain. In Q2, currency impacts and slower sales in China due to COVID lockdowns helped drive the disappointing revenue report despite broadly stronger international sales. Consolidated revenues decreased 3% from the prior year, with a 6% impact of currency impacts blamed for the decline. But on the whole, these are relatively light concerns compared to what some other mega caps are dealing with now.
Strategic Research Partners CEO Jason Trennert made the point earlier this week that while the broader equity market is likely going lower, speculative stocks leading the way, so-called well-established companies, or what he calls “fortress stocks,” should be able to succeed in this market. He counts McDonalds as one of them. Elsewhere on Wall Street, Morgan Stanley (NYSE:MS) analyst John Glass lowered his price target on Mcdonald's stock to $285 from $287. This was a fairly minor adjustment, all things considered, as he still maintained the Overweight rating on the shares. This fresh price target points to an upside of at least 10% from where shares closed on Tuesday and were to hit. They’d be at fresh all-time highs.
Beating The Competition
On a broader industry move, Glass and the team reduced their second half and 2023 estimates across much of their restaurant and foodservice distributors coverage ahead of Q2 earnings reporting to reflect expected softening sales as consumers face rising pressures. Out of that bunch, though, Mcdonald's is easily one of the strongest and best performing. Its shares are up a complete 18% from the lows of March, versus the 6% lighter than the S&P 500 index is over the same time.
Looking at some other well-known names in the fast food space only cements Mcdonald's position as an industry and effectively market leader right now. Chipotle (NYSE:CMG) shares are close to 2022 lows, while the likes of Shake Shack (NYSE:SHAK) are only marginally above the levels they hit during the worst of the pandemic driven sell-off in 2020. This will be a summer and a year when investors have to be pickier than ever with stocks they choose to add to their portfolio. Increasing sales, better than expected earnings, and outperforming competitors are three good characteristics to start that search with. On all three fronts, Mcdonald's is delivering right now.
