Back in January, we saw shares of fast-food giant McDonald’s Corporation (NYSE:MCD) soar to nearly $180 as investors cheered the improvements that CEO Steve Easterbrook made to the chain. However, since then McDonald’s stock has been rife with uncertainty as investors sell on worries about volatility in the year ahead.
What Happened?
Early in March, McDonald’s stock dipped below $150 per share after analysts began to question the firm’s future. RBC Capital Market analyst David Palmer pointed to the company’s value menu offerings as reason to worry about MCD sales going forward.
Palmer’s comments came after McDonald’s execs vowed to focus on value throughout 2018, meaning the company intends to emphasize it’s $1, $2 and $3 value menu offerings.
On top of that, many investors were disappointed with how the new tax code affected McDonald’s stock as it didn’t give the firm the massive boost that many had been expecting. McDonald’s management said it will likely see $6 billion in savings over the next two years, but that cash won’t be going straight to shareholders.
Instead, the firm is planning to reinvest that money on growing its U.S. operations.
What Does it Mean?
From where I’m standing, there doesn’t look to be much reason for the McDonald’s stock sell off. Although it’s disappointing that McDonald’s wont be raking in a pile of cash under the Trump administration’s new tax code, the firm isn’t being hurt by the tax plan either.
The money the firm is brining in will be used to grow the business, something shareholders should celebrate rather than shun.
The value menu concerns are valid but certainly overdone. Analysts at Jefferies cited a social media study that showed consumers weren’t talking about MCD’s value menu offerings as reason to believe the initiative was failing, but I’m not convinced that’s a good reason to believe that value menus aren’t resonating with consumers.
MCD has built its brand on offering fast, inexpensive food so it’s vital that the firm offers a variety of value offerings to its customers. Not only that, but McDonald’s has been working to improve the quality of its ingredients as well as its image in order to make those low-cost offerings even more valuable to customers.
Improvements to the company’s value menu are important for those reasons, which I’m not convinced are represented through social media buzz.
The Future for McDonald’s Stock
Another big reason I like MCD as a fast-food play is that the firm appears to be building out its brand in a way that will be relevant in the future. I’ve written before about the massive success of Starbucks Corporation’s (NASDAQ:SBUX) digital presence because it’s helped the company better understand its customers and keep them coming back.
McDonalds has been building out its own app, and so far the company appears to be successful. With technology playing a much larger role in consumers’ lives, a popular app is a good sign that the restaurant has staying power.
Part of McDonald’s digital strategy has been to add mobile ordering options and delivery offerings- neither of which have been fully implemented yet.
While some analysts say MCD is biting off more than it can chew with such a long list of initiatives, it could be a good sign that Easterbrook and his team are willing to make necessary improvements to ensure that McDonalds changes with the time.
McDonald’s Stock Is Still Cheap Buy
McDonald’s stock price today makes the firm a much cheaper buy than it was just a few months ago and considering the company’s growth potential, that makes now a great entry point. MCD stock is trading at 20.8 times its forward earnings- putting it inline with the industry average of 21.4.
The company also offers a 2.56% dividend yield, which should sweeten the wait for the stock to regain its momentum.
This year is set to be a big growth year for the company- the firm’s re franchising initiative is seen boosting profit margins above 40% by next year and customer traffic is likely to rise over the longer term as the company moves forward with its image overhaul and food quality improvements.
The Bottom Line
The pullback in McDonald’s stock shouldn’t worry current investors and those that have had their eye on the golden arches might want to act now. Worries about a value menu misstep are overdone, and even the analysts at Jefferies that shined a spotlight on the firm’s shortcomings had a price target of $200 suggesting that there’s an upside of more than 20%.
As of this writing Laura Hoy was long SBUX.
