Is McDonald’s a ‘Buy’ at These Levels?

McDonald’s (NYSE:MCD) stock has increased by over 50% from its March lows. Optimism about reopening the economy, fiscal stimulus packages, and progress in COVID-19 treatment led to a rise in the company’s stock price. On June 16, the company announced that 95% of its restaurants were open. Also, McDonald’s SSSG showed sequential improvement in May. Despite the recent surge, the company still trades 15.9% lower than its 52-week high of $221.93. So, should you accumulate the stock at these levels?

Analysts’ revenue expectations for McDonald’s

Analysts expect McDonald’s to report revenue of $18.32 billion and $21.1 billion in 2020 and 2021, respectively. These expectations represent a fall of 13.1% in 2020 and a growth of 14.9% in 2021. Temporarily closing restaurants and a decline in the SSSG amid the COVID-19 outbreak could drag the company’s sales down this year. Meanwhile, the company has opened 99% of its restaurants as of June 15. In international markets, the company has opened 85% of its restaurants. Most of the restaurants only operate the drive-thru, delivery, and takeaway services with a limited menu. In the US, the company announced that it has opened 1,000 restaurant dining rooms, which operate with limited capacity. On June 16, the company announced that it will invest $200 million towards marketing, which will be recorded in the company’s second-quarter earnings. So, I think that growth in the digital, drive-thru, and delivery sales and opening new restaurants could drive the company’s revenue next year.

Analysts’ EPS expectations

Analysts expect McDonald’s to report an adjusted EPS of $5.66 in 2020 and $7.98 in 2021. These estimates represent a fall of 28.6% this year and growth of 38.6% in 2021. This year, the sales deleverage from negative SSSG and higher SG&A expenses could drag the company’s EPS down. Higher cleaning expenses due to the pandemic, franchise support initiatives, and increased marketing spending could increase the SG&A expenses. In 2021, the sales leverage from positive SSSG and a decline in SG&A expenses could drive the company’s EPS growth.

McDonald’s dividend yield and valuation multiple

On May 22, McDonald’s board declared a quarterly dividend of $1.25 per share with an annualized payout rate of $5.00 per share. As of June 13, the company’s dividend yield was 2.7% with its stock price trading at $186.62. On the same day, Starbucks (NASDAQ:SBUX), Jack in the Box (NASDAQ:JACK), and Wendy’s (NASDAQ:WEN) dividend yields were 2.18%, 2.23%, and 0.91%, respectively.

As of June 12, McDonald’s was trading at 33x analysts’ 2020 EPS expectations and at 23.4x analysts’ 2021 EPS expectations. So, given the near-term risks, the company is trading at a higher valuation multiple.

Analysts’ recommendations

Analysts have become bullish on the stock. Since the beginning of this month, Guggenheim, Piper Sandler, RBC, UBS, Stifel, Cowen, Jefferies, and SunTrust Robinson have all raised their target prices. As of June 23, analysts’ consensus target price was $207.28, which represents a 12-month return potential of 11.1%. Wall Street favors a “buy” rating for the stock. Among the 35 analysts, 74.3% recommend a “buy” rating, while 25.7% recommend a “hold” rating.

Stock performance and my take on McDonald’s

Despite the recent surge, McDonald’s has lost 5.6% of its value this year. Temporary restaurant closures, negative SSSG, and weakness in the broader equity have been a drag on the company’s stock price. In April, the company reported a mixed first-quarter performance. Read Why Did McDonald’s Stock Fall after Its Q1 Results? to learn more. So far this year, the company has underperformed the broader equity markets. The S&P 500 Index has declined by just 3.1% during the same period. Meanwhile, Starbucks, Jack in the Box, and Wendy’s have fallen by 14.1%, 6.6%, and 1.4%, respectively. On Tuesday, Starbucks introduced a plant-based sandwich. To learn more, read Starbucks Partners with Impossible Foods for Breakfast Sandwich.

Overall, I’m bullish on McDonald’s. Although the company operates with limited capacity and menu items, the company’s SSSG should improve due to its investment to expand the drive-thru, delivery, and takeaway services. Also, the company operates over 93% of its restaurants through franchisees. McDonald’s will be impacted less by a sales decline compared to a company with a higher percentage of company-owned restaurants. So, I think that investors with long-term horizons should accumulate the stock.