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Inside Scoop: Is McDonald’s a ‘Buy’ in March?

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So far in 2020, McDonald’s (NYSE:MCD) has outperformed its peers and the broader equity market. As of March 6, the stock has returned 0.6%, while the S&P 500 Index has fallen by 8.0%. Starbucks (NASDAQ:SBUX), Chipotle Mexican Grill (NYSE:CMG), and Shake Shack (NYSE:SHAK) have fallen by 14.3%, 13.6%, and 12.3%, respectively. On January 29, McDonald’s reported an impressive fourth-quarter performance. Also, by the end of 2019, 93% of the company’s restaurants were franchised. The company operated a higher percentage of franchised restaurants compared to Starbucks, Chipotle, and Shake Shack. The coronavirus outbreak might have a minimal impact on McDonald’s compared to its peers. Should investors consider buying McDonald’s? First, we’ll look at analysts’ expectations for 2020.

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Analysts’ revenue expectation for McDonald’s

Analysts expect McDonald’s to report revenue of $21.96 billion in 2020—a rise of 4.2% from $21.1 billion in 2019. We expect that opening new restaurants and a positive SSSG could drive the company’s revenue this year. For 2020, McDonald’s plans to open 1,400 restaurants. Most of the restaurants are located outside the US. We expect that implementing EOTF (Experience of the Future) in more restaurants, expanding delivery service, installing digital advancements to better engage with customers, and undertaking menu innovations to drive the company’s SSSG.

By the end of 2019, McDonald’s installed EOTF in 10,000 or 70% of its restaurants in the US. In 2020, the company plans to deploy EOTF in 1,800 restaurants. Notably, EOTF improves customers’ experience and convenience. The company offered McDelivery in approximately 25,000 restaurants by the end of the last quarter. The expanding delivery service could drive the company’s delivery sales this year.

In December 2019, McDonald’s acquired Dynamic Yield, which delivers a more customized drive-thru experience for customers. The company implemented the technology in 11,000 drive-thrus. So, implementing the technology in more drive-thrus could help the company’s sales.

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McDonald’s EPS could rise in 2020

For 2020, analysts expect McDonald’s to report an adjusted EPS of $8.53—a rise of 8.7% from $7.84 in 2019. The revenue growth, higher gross margin, and share repurchases could drive the company’s EPS. However, an increase in D&A (depreciation and amortization), SG&A, and interest expenses could offset some of the gains.

For 2020, McDonald’s management expects D&A expenses to rise by $80 million due to the deployment of EOTF in more restaurants. They expect the company’s G&A expenses to increase 5%–7% due to the investment in technology and R&D. Also, the management expects the unfavorable currency to lower the company’s EPS this year.

Moving to share repurchases, McDonald’s repurchased 25.0 million shares for approximately $5.0 billion in 2019. In December 2019, the company’s board terminated a share repurchase program announced earlier. The board authorized a new $15 billion share repurchase program, which was effective on January 1, 2020.

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Dividend yield

On January 23, McDonald’s board announced quarterly dividends of $1.25 per share with an annualized payout rate of $5.00 per share. The company would pay the dividends on March 16 to shareholders recorded as of March 2. As of March 6, the company’s dividend yield was at 2.5%. Meanwhile, Starbucks’s dividend yield was at 2.15% on the same day.

Analysts’ recommendations

Since McDonald’s reported its fourth-quarter earnings, MKM Partners, Jefferies, Cowen and Company, RBC, Wells Fargo, Guggenheim, Deutsche Bank, and BMO have raised their target price. However, Telsey Advisory Group has lowered its target price from $239 to $237. As of March 6, analysts’ consensus target price was $230.10, which represents a 12-month return potential of 15.7%.

Wall Street prefers a “buy” rating for McDonald’s. Among the 33 analysts, 25 recommend a “buy,” while eight recommend a “hold.” None of the analysts recommend a “sell.”

My take on McDonald’s

There’s a weakness in the broader equity market due to the coronavirus outbreak. I expect McDonald’s stock to be under pressure in the short term. However, I’m optimistic about the company’s growth initiatives like implementing EOTF, expanding the delivery service, and implementing other digital advancements. Also, with 93% of McDonald’s restaurants franchised, the coronavirus will have less of an impact on the company compared to its peers.

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