McDonald’s Surges Higher After Profits Grow 20%

Stock (Symbol)

McDonald’s (MCD)

Stock Price

$151

Sector

Retail & Travel

Data is as of

June 6, 2017

Expected to Report

Jul 25

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) continues on the path of success as the stock shot to an All-Time high after profits jumped 20% last qtr. Last year the company sparked sales with the All-Day Breakfast menu and McPick 2 and profits jumped a solid 15%. This year, comparisons should be tougher due to last year’s success. Last qtr analysts expected 2017 profit growth of 8%, but now that number up to 12% as MCD beat the street last qtr. Investors shot the stock up from $134 to $151 after the company reported profit growth of 20% which beat estimates of just 8% growth. This stock has an Est. LTG of 9% a year plus pays a 3% yield. But the company has grown profits 12% the past decade — and is growing faster than that now. The P/E is 24 right now, compared to the median P/E of 21 during 2015 and 2016. My Fair Value is 21x earnings, or $130 a share this year and $139 in 2018. With the stock selling around $150, I think its high. Honestly, when the stock was $120 I was going to buy but tried to wait and get it at $115. That was a mistake, but taught me this stock is very appreciated right now –which is a good thing. Now we just need a nice stock market correction to bring MCD down so I can add it to the Conservative Growth Portfolio.

One Year Chart

McDonald’s grew profits 20% last qtr, which whipped estimates of 8%. Sales declined 4% due to an accounting change, but same store sales rose a robust 4%. Afterwards, NxtQtr’s estimate increased from 8% to 11% but my guess is MCD could beat that number too. Qtrly profit Estimates for the next 4 qtrs are 11%, 7%, 11% and 3% so the company could quite possibly grow profits 15% this year. That would be amazing, no wonder the stock’s up so high. So high in fact, it looks dangerous to buy here.

Fair Value

This P/E of 24 is high on a historical basis. Perhaps the stock won’t come down enough to let us get in at $134. We’ll see. That’s a good target price though.

Bottom Line

McDonald’s one of those stocks you could hold for decades or even generations. The stock growth rate and profit growth rate of 12% per year the last decade is exceptional. MCD is a very safe stock with a juicy yield of 3% to go with it. MCD is on my radar and I would like to add it to the Conservative Portfolio if it drops 10% to $134 or so.