Breaking News
Investing Pro 0
Free Webinar - What Is a Gold IRA? Fees, Advantages, and Risks - December 7, 2022 | 01:00PM EST Enroll Now

McDonald's: Long-Term Case Doesn't Help The Global Restaurant Chain Right Now

By Vince MartinStock MarketsSep 28, 2022 07:27AM ET
www.investing.com/analysis/mcdonalds-longterm-case-doesnt-help-the-global-restaurant-chain-right-now-200630402
McDonald's: Long-Term Case Doesn't Help The Global Restaurant Chain Right Now
By Vince Martin   |  Sep 28, 2022 07:27AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
MCD
+0.15%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
EUR/USD
+0.37%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/JPY
-0.36%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/CNY
-0.32%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DXY
-0.32%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Could argue that McDonald's stock is a long-term buy right now
  • But markets are slumping and the U.S. dollar is very strong
  • So, no need to rush into MCD

Long term, McDonald's (NYSE:MCD) almost certainly will be fine. The world's second largest restaurant chain by number of locations (incredibly, Subway still is number one on that list) is one of the world's great brands.

The on-again, off-again execution issues that plagued the company for years seem to be in the past. And the franchised nature of most restaurants—93% at the end of 2021, according to company filings with the U.S. Securities and Exchange Commission—protects the company from potential cost inflation.

But the long-term health of the business is not the only consideration for buying the stock in the short term. That's particularly true in this volatile and, at the moment, downward-facing market. Investors no doubt could do much worse than to own MCD right now. But for two core reasons, they could also take what appears to be the wiser choice.

The U.S. Dollar Problem

In an environment of enormous inflationary and recessionary risk, MCD seems like an attractive choice. The restaurants are lower priced than essentially every other away-from-home option out there, which mitigates the inflation problem. And even in a recession, consumers still need to eat. Should unemployment rise, some consumers may trade down to McDonald's instead of paying higher prices at other chains or sit-down restaurants.

Indeed, precisely this pattern played out during the 2008-2009 financial crisis. In 2009, McDonald's same-restaurant sales worldwide actually increased 3.8%, with visitation up 1.4%. The following year, same-restaurant sales grew 5.0%, with the guest count rising 4.9%.

But the current situation may be different. Inflation was not a threat during the financial crisis, so this time around, consumers may simply save whatever money they can by eating at home. More importantly, the U.S. dollar has strengthened enormously.

In 2021, only 38% of McDonald's revenue, and 46% of operating profit, came from the U.S. The rest of the profits are denominated in currencies other than the dollar—and in dollar terms, those currencies have plunged.

The Dollar Index has increased 19% year-to-date. What that means is that 54% of McDonald's revenue that comes from overseas translates into dollars at a far lower rate. What it also means is that in-country rivals, who care only about profits in euros, yen, or yuan, have a pricing advantage.

The dollar already has hurt McDonald's results. In the first half of the year, adjusted earnings per share increased 12% as reported—but 17% in constant currency. The pressures are going to get worse: the dollar already has increased more in the third quarter than it did in the first six months of 2022.

McDonald's Refranchising

In this context, the proportion of franchised restaurants becomes a problem. At the end of 2009, 81% of restaurants were franchised; as noted, the figure now is 93%.

That growth came from a so-called "refranchising" strategy accelerated by former chief executive officer Steve Easterbrook. The idea was to create a leaner, slimmer McDonald's whose profit growth would come almost solely from revenue growth. McDonald's profit now comes, essentially, from franchise revenue less corporate costs.

Refranchising unquestionably has worked. Including dividends, MCD has returned 235% over the past decade. But the reliance of the franchise model on revenue growth means that the stronger dollar now has an even more significant—and negative—impact on profits. Over half of revenue is booked in overseas currency; the same is not true for the company's total costs, much of which land at the corporate level.

Given dollar strength and first half results, it's likely that, for the full year, currency will take 8-9 points off McDonald's profit growth—with more headwinds likely on the way in early 2023, at least.

The Valuation Problem

To be sure, McDonald's still did grow earnings per share double digits in the first half. Even assuming a currency-driven second-half slowdown, the business remains in solid shape.

But this is not a stock necessarily priced for being in "solid shape." At the moment, MCD trades at 24x this year's consensus earnings per share estimate. That’s well toward the high end of the stock’s long-term range.

Even with MCD down 11% just in the last six weeks, shares still don't look particularly cheap. The current stock price assumes relatively strong growth from the current levels.

In recent years, McDonald's has absolutely driven that growth. Assuming consensus estimates for 2022 are correct, the company will have grown earnings per share by 81% in six years, an annualized rate of over 10%.

But that growth came in the context of a far more benign currency and inflationary environment. A global slowdown could help the company as it did in 2008-09, and offset some of those pressures.

Still, there's a pretty clear likelihood that McDonald's earnings growth slows to the mid-single-digits range in terms of percentage. And that's not what investors are paying 24x for, particularly in this market.

It seems likely that until last month investors had flocked to MCD as a supposed safe haven. Indeed, the stock nearly reached a new all-time high in mid-August. But what investors are realizing now is that there are no safe havens in the equity market—not even McDonald's.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

McDonald's: Long-Term Case Doesn't Help The Global Restaurant Chain Right Now
 

Related Articles

McDonald's: Long-Term Case Doesn't Help The Global Restaurant Chain Right Now

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Marec Huber
Marec Huber Oct 27, 2022 12:01PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
We’ll see.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email