All Day Breakfast is a Hit for McDonald’s and its Stock

Stock (Symbol)

McDonald’s (MCD)

Stock Price

$125

Sector

Retail & Travel

Data is as of

February 2, 2016

Expected to Report

Apr 22

Company Description

McDonald’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

McDonald’s (MCD) all-day breakfast helped boost profits last qtr, and the McPick Menu which gives customers 2 items for $2 should keep the momentum rolling. Last qtr the burger chain had 16% profit growth on a 4% decrease in sales. If you take out the effect of foreign exchange, sales would have increased 4% and profits 26%. The all-important same store sales growth was 6% in the US and 4% Internationally. In New York the McPick menu is boosting traffic in stores, and I can see people are taking advantage of the all-day breakfast too. MCD stock is also on a roll, breaking out at $100 last year and shooting to $125. But at 23x earnings, this 10% grower isn’t on the value menu. I feel MCD is worth 20x earnings, or $108 a share. Still, this is a great buy-and-hold stock for conservative investors. The estimated long-term growth rate is 10% plus the yield is 3%, for a hypothetical 13% total return. MCD earns a top safety rating from Value Line and has increased its dividend each and every year since first paying one in 1976.

One Year Chart

Nice profit growth McDonald’s is kicking out right now. And since profits were poor three and four qtrs ago the company has easy comparisons coming up. Still, a P/E of 23 is a little rich. And this move higher looks too much, too fast.

Fair Value

Although the turnaround at McDonald’s is considered a success, 2016 estimates need to continue to increase to be back to all-time highs again. My Fair Value for 2016 is $108 and 2017 is $121, but the company has beaten the street the past three qtrs and profit estimates just increased.

Bottom Line

McDonald’s has its groove back as the all-day breakfast and McPick 5 are getting customers in the door. This is a great buy-and-hold stock for conservative accounts, but at this time I would wait for MCD to simmer down before taking a position.