Can McDonald’s Stock Really Maintain Its Strength for Much Longer?

MCD stock - Can McDonald’s Stock Really Maintain Its Strength for Much Longer?

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Since the second week of October, investors have started to worry about the broader markets. I’m afraid the most recent session didn’t do much in allaying those fears. However, McDonald’s (NYSE:MCD), in addition to offering world-class fries, has presented a respite. MCD stock has held strongly in the face of severe volatility.

Prior to the MCD earnings report for the third quarter, McDonald’s stock had only lost 1% against the October opener. That’s nothing compared to what so many other publicly traded companies have suffered. For instance, the benchmark exchange-traded fund SPDR S&P 500 ETF (NYSEARCA:SPY) dropped nearly 6% over the same timeframe.

In large part, you can thank the resilience in the restaurant and fast-food sector. Rival Wendy’s (NASDAQ:WEN) had also lost only 1% since October’s opening price. Darden Restaurants (NYSE:DRI) enjoyed an outstanding performance in the second half of 2018, and has only mildly corrected this month. Therefore, the underlying industry favors MCD stock.

Another factor that has lifted sentiment toward McDonald’s stock is the consumer economy. While not the perfect indicator, unemployment continues to trek downward. For the latest read in September, unemployment dropped to 3.7%. We haven’t seen levels like that since the late 1960s.

Moreover, the fast-food icon has implemented many changes in recent years to stay relevant with an emerging demographic. No longer the boring affair it used to be, McDonald’s has revamped its overall presentation. Not surprisingly, MCD stock has mostly benefited from the strategy shift.

But not everything is going the Golden Arches’ way. China weighs heavily on almost every industry, and McDonald’s stock is no exception. Company CEO Steve Easterbrook mentioned exactly that, citing declining foot traffic in Chinese McDonald’s locations.

Plus, not every fast-food restaurant is doing well. So how did MCD stock stack up for Q3?

MCD Earnings Come Up Big

Prior to Tuesday’s opening bell, the futures market implied that the Dow Jones Industrial Average would start down more than 400 points. Therefore, it was crucial for MCD earnings to deliver, and they did. Not only did McDonald’s stock jump higher, it periodically reduced the Dow’s opening deficit by around 25 points.

Wall Street pegged consensus MCD earnings-per-share at $1.99. This was decisively near the lower end of individual estimates, which ranged from $1.93 to $2.11. Actuals came in just under the most optimistic forecast at $2.10. In the year-ago quarter, McDonald’s delivered EPS of $1.76, missing the consensus target by one penny.

On the revenue end of the picture, the Street anticipated revenue of $5.32 billion. Again, this was noticeably near the lower end of individual forecasts, which ranged between $5.1 billion and $5.7 billion. The actual tally was $5.37 billion, just under 1% higher from the consensus. In Q3 2017, McDonald’s hauled in almost $5.8 billion.

The granular details further demonstrated the robust nature of the earnings beat. This marked the 13th consecutive quarter in which McDonald’s saw positive same-store sales growth. International results represented the biggest and most important surprise, with global same-store sales increasing 4.2% against a consensus 3.6%. Domestically, the fast-food giant experienced 2.4% growth, in line with analysts’ expectations.

As you would expect from such standout results amid the broader carnage, MCD stock jumped significantly during premarket trading. Shares exceeded 3% before settling into a range around 2.5%.

What the MCD earnings report confirms is that the company’s longer-term strategies and infrastructure overhaul gained traction. McDonald’s refreshed its menu, offering both premium and “Dollar Menu” items. Additionally, the Golden Arches joined the twenty-first century, introducing mobile and kiosk ordering systems. Plus, it’s currently experimenting with delivery via UberEats.

But Should you Buy MCD stock?

In a gutted market environment, the Golden Arches truly lived up to its brand. However, should investors dive into MCD stock like they would dive into their fries? This is where the situation gets tricky.

Domestically, the restaurant industry experienced the best Q3 sales growth since 2015. That’s a very encouraging sign. What’s not so uplifting, though, is that McDonald’s only managed to meet consensus expectations for same-store growth. Since international metrics came up big — especially against foreign-currency headwinds — the domestic sales were a little bit disappointing.

This segues into the broader revenue trend. In the prior Q2, sales declined 11.5% year-over-year. In Q3, sales dipped approximately 7% YOY. Sure, it’s an improvement, but MCD is still on pace for consecutive years of annual revenue declines. That sets up a pressured situation for McDonald’s stock for the next Q4.

I like the fact that MCD stock pays out a 2.8% dividend yield. In this environment, it’s huge. However, the broader markets are getting uglier, which indicates that the consumer economy will feel the pain. As a result, I’d wait for a pullback before buying shares.

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

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