Now Is the Time to Buy the Dip in McDonald’s Corporation Stock

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McDonald's stock - Now Is the Time to Buy the Dip in McDonald’s Corporation Stock

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Essentially, everything in the stock market collapsed in early February. But most stocks have bounced back. One stock that hasn’t really is McDonald’s Corporation (NYSE:MCD). McDonald’s stock dropped from $180 to below $150 in a matter of weeks.

Its rebounded to around $160 since, but its still 11% off its all-time high. The S&P 500, by comparison, is just 3% off its all-time high. Why the big weakness in McDonald’s stock?

A confluence of headwinds, some of which are macro and others of which are micro. Consequently, analysts have been trimming estimates, and that has led to the McDonald’s stock drop.

But all those headwinds are near-term in nature. In the bigger picture, McDonald’s continues to do the things that have made it a winning investment over the past several years, and that is redefining itself as the go-to fast casual chain in the overlap of price and health.

As such, MCD stock is a buy on this dip. The near-term may be choppy. But MCD stock will be notably higher in a multi-quarter window as initiatives like fresh Quarter Pounders and “Better Chicken” materialize.

Health Initiatives Will Drive Continued Success for McDonald’s

The recent weakness in McDonald’s stock is pretty straightforward.

The company reported pretty solid fourth quarter numbers at the end of January, with comparable sales growth hitting 5.5%, a full percent above analyst expectations.

But then the market took a tumble in February. MCD stock fell with it. But the stock didn’t rebound with much velocity because they were some negative reads on restaurant sales in January and February from TDn2K.

Consequently, RBC Capital Markets, Bank of America Merrill Lynch, and Credit Suisse all cut near-term estimates on MCD. Those cuts have further weighed on MCD stock, and now it still trades more than 10% off its recent highs against the backdrop of a rebounding broader market.

But the reasons for the lowered estimates are all near-term in nature.

They include adverse macro conditions for restaurant sales, including bad weather, and an over-hyping of the $1, $2, $3 value menu, which stole attention from MCD’s real growth drivers, like the Big Mac Trio and All-Day Breakfast.

Analysts consequently believe that same store sales growth will largely miss expectations in the first quarter.

Longer term, though, bad weather and an over-hyping of a value menu aren’t material headwinds. The bigger picture with MCD stock remains that this company is reforming itself as a fast casual chain that offers much improved quality food and an enhanced quality of service for still really cheap prices.

The company continues to roll out initiatives that are driving this bigger picture growth narrative forward. Notably, McDonald’s just rolled out fresh beef for its popular Quarter Pounders and other premium burgers to 3,500 locations.

The company plans to roll out fresh beef to the rest of its U.S. locations soon. McDonald’s is also pushing forward with its “Better Chicken” initiative, de-emphasizing traditionally unhealthy Chicken McNuggets and putting attention on its healthier Buttermilk Crispy Tenders.

This switch in emphasis is clearly working. The new chicken tenders are so popular that they are selling out at several locations.

All in all, MCD continues to do what has made it so successful over the past several years, and that is improving its quality of food while maintaining industry low prices. As such, near-term headwinds from bad weather or a misstep in marketing won’t keep MCD stock down for long.

Bottom Line on McDonald’s Stock

Nothing has fundamentally changed about the big picture growth story at McDonald’s over the past 2 months.

The company continues to revamp its menu to thrive in the overlap of price and health. Indeed, some of the biggest pushes in that revamp (fresh beef for Quarter Pounders and a more broad healthy chicken roll-out) are still in the works.

The only difference is that McDonald’s stock is now cheaper than it was a month ago.

Expect near-term choppiness amid analysts lowering quarterly estimates. But this is a golden buying opportunity for long-term investors.

As of this writing, Luke Lango was long MCD.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/mcdonalds-stock-buy-dip/.

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