McDonald’s Stock Isn’t Bad, But You Have Better Options (MCD)

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After a big six-month pop, McDonald’s Corporation (MCD) stock is starting to pull back, now a whole 3% off the high it set on Feb. 1. Ironically, this move comes as the market has finally reversed, and the S&P 500 out of correction territory. What this illustrates is that there are far better opportunities than McDonald’s stock in a bullish market, but still, that doesn’t mean you should dismiss it entirely.

mcdonald's stock mcd stockWhen all is good in the market, and stocks are trading higher, a low-beta, high-yield investment in a company that lacks any growth isn’t too high on the retail investor’s list of priorities. Granted, some will argue that MCD has turned back the hands of time, and is now a recovery story with newfound growth.

These investors are referring to the fact that MCD had a strong fourth quarter with U.S. comparable store sales growth of 5.7%. This performance is a reflection of McDonald’s successful all-day breakfast initiative, as U.S. comp sales performed better than global comp growth of 5%.

Nevertheless, total sales still declined 4% during this strong fourth quarter, with MCD’s full year sales falling by more than $2 billion versus the year prior. Furthermore, McDonald’s full-year revenue is expected to fall 5% this year and another 6% in 2017. If this plays out, then McDonald’s would have posted four consecutive years of revenue declines by the end of 2017, with a total annual loss of $5.6 billion from FY2013 to FY2017.

Darden Has a Rosier Outlook Than McDonald’s Stock

MCD isn’t improving at the rate that some retail investors believe. Yet, it is a large global company, and McDonald’s stock pays a dividend yield of 3%. In addition, MCD has reduced its share count by 11.5% over the last five years, which helps support downside in McDonald’s stock. Therefore, when the market falls, MCD stock is very attractive, and in the event that the market begins to crash once more, investors would be wise to gravitate towards McDonald’s stock.

However, with industries like energy, transports, biotech, and banks leading this current market rally, securities like McDonald’s stock lose their appeal.

MCD stock is trading at 20 times FY2017 expected EPS, which is very expensive compared to banks, oil companies, and many other stocks that have been crushed over the last few months. As a result, it is hard to make a case for owning MCD stock right now.

With gas prices at decade lows, consumer spending at restaurants is likely to be higher. Therefore, in the event that the markets start to tumble again, McDonald’s stock isn’t a bad investment. However, it is a 50/50 bet to guess where the market is going short-term, and in looking long-term, MCD stock is expensive given that it has no growth.

As a result, investors who want exposure to the restaurant sector with less risk than MCD would be better off with Darden Restaurants, Inc. (DRI).

Darden grew revenues 7.6% during its last fiscal year, and the top line is expected to grow 2.2% this fiscal year and 4% next year. DRI stock has the growth that retail investors seek in bullish markets. But, it also has the downside cushion of a 3.3% dividend yield and the safety of being a restaurant business in a low-gas-price environment.

The valuation also helps set it apart from McDonald’s stock. DRI stock trades at just 16 times next year’s expected earnings, thereby making it a cheaper stock that’s growing faster and paying out a bigger yield. Hence, if you are going to own a big restaurant, DRI stock looks much better regardless of market conditions.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/mcdonalds-stock-md-dri/.

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