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McDonald’s: Investors Are Lovin It

Stock (Symbol)

McDonald’s (MCD)

Stock Price

$123

Sector
Retail & Travel
Data is as of
June 10, 2016
Expected to Report
July 26
Company Description
mcdonalds_happymealMcDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve menu at various price points providing value in 119 countries globally. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. Source: Thomson Financial
Sharek’s Take
David SharekCustomers are lovin McDonald’s (MCD) All Day Breakfast and McPick 2. Company profits are expected to grow 11% this year, and investors have taken notice. The stock was under $100 for many years and in a little more than 6 months have shot past $120. McDonald’s is an excellent investment for conservative and retirement accounts. The stock is extremely safe and pays dividend a dividend of 3% — a dividend which has increased each and every year since MCD first paying one in 1976. Analysts have an estimated long-term growth rate of 11% on the stock, and if you add in the 3% yield that’s a hypothetical 14% total annual return. The unfortunate thing is now the stock is a little high. MCD has had a P/E of around 18 the last decade and now the P/E is 22. I feel the stock is worth 20x earnings, which means MCD is overvalued by 10% (to me anyway). I have this stock on my radar for conservative accounts, and would be inclined to purchase it around $110 a share.
One Year Chart
MCD_2016_Q2Last qtr MCD had 22% profit growth, cruising past the 14% estimate. Sales declined 1% but would have grown 3% were it not for the negative effects of foreign exchange. Profit estimates increased by a good amount. 2016’s went from $5.38 to $5.55 and 2017’s from $6.03 to $6.19. Profit growth estimates for the next 4 qtrs are 11%, 7%, 10% and 10% and although that’s not great compared to many of my other stocks, that’s very good for a safe stable stock like MCD.
Fair Value
MCD_2016_Q2_PHAfter a two-year downturn (2014-2015) profits look to return to an All-Time high this year. What’s interesting is MCD made $5.55 in 2013 and the median stock price was $96. Now it’s set to earn the exact same amount and the stock is $123. My 2017 Fair Value is $124, so you could buy now if you wish but the returns might not be that great.
Bottom Line
MCD_2016_Q2_10yrMcDonald’s is back-on-track with both customers and investors. What’s nice about a stalwart like this is the stock can sit there for years, then new management can reinvigorate the brand and bring new life into the stock. This is an excellent core holding for investors who like to hold for decades, with a 11% estimated long-term growth rate and a 3% yield which has increased for 40 years. I would like to buy the stock for conservative investors, but will hold out for a better price as I feel the shares are 10% overvalued.
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