McDonald’s Sales Rebound; Should You Buy?

No giant company is more nimble, but the valuation still looks high

By Dan Burrows, InvestorPlace Feature Writer

Dependable Dividend StocksSay what you will about McDonald’s (NYSE:MCD), but the world’s biggest restaurant chain sure is nimble. Some rapid late-summer tinkering with prices allowed the Dow component to post smart August same-store sales growth after a complete stall-out in July.

Same-store sales, which measure receipts from locations open at least 13 months, jumped 3.7% in August, thanks in large part to growth in China. True, the headline number was just shy of analysts’ average forecast, but the composition of the increase was heartening — as was the improvement over last month, when MCD posted no global same-store sales growth.

Don’t Sweat Panicked Coffee Headlines
Don’t Sweat Panicked Coffee Headlines

The fast-growing Asia, Africa and Middle East region posted same-store sales growth of 5.7%, well ahead of estimates for a 4% gain. That’s critical, because McDonald’s is far less recession-proof overseas, where prices are relatively much higher than in U.S. locations.

Even better, same-store sales rose 3% in the U.S. and 3.1% in Europe. Although both figures were just shy of Street forecasts, they were far better than July’s results, when domestic sales actually declined.

Shoot, a month ago, total same-store sales missed Wall Street’s forecast by 2.3 percentage points, hurt by the sluggish U.S. and European markets, as well as Asia, the Middle East and Africa. Indeed, July’s figures were the worst showing in almost a decade for the fast-food behemoth.

But by doubling down on breakfast menus and value items, more fast food for the buck gave the company a strong late-summer lift.

Still No Bargain

However, despite being off about 8% for the year-to-date and lagging the S&P 500 by more than 20 percentage points, MCD still looks too pricey.

Sure, China and Australia bounced back in August, but same-store sales still showed signs of weakness in Japan and Germany. And don’t forget that Europe — McDonald’s biggest market at 40% of revenue — is in recession. Sure, promotions tied to the London Olympics helped lift results last month, but the summer games are over; the desultory economy lingers on.

No giant company may adjust to problems more deftly than McDonald’s, but every time it plugs one leak, the poor global economy springs another. Meanwhile, low-priced fare from rivals like Yum! Brands (NYSE:YUM) have opened another affront on growth.

As I said last month, MCD’s dividend and total return history makes it a core holding for any long-term equity-income portfolio, and it’s on InvestorPlace’s list of Dependable Dividend Stocks. But it was too expensive back then, and a recent share-price increase has only made the valuation look more stretched now.

McDonald’s currently sports a forward price-to-earnings ratio of 15.4 — up from 14.4 a month ago. That’s currently in line with the stock’s own five-year average, despite entering a period of what looks to be slower earnings growth.

MCD also is significantly more expensive than the S&P 500, but it has a lower growth forecast, meaning it probably doesn’t warrant the premium valuation.

Make no mistake: McDonald’s pulled out a nice comeback in the summer’s late innings, but only after one of its worst showings in ages. If you own the stock, stick with it. But if you don’t, don’t start now.

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

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