Despite the broader market volatility since October 2018, on Nov. 29, McDonald’s (NYSE:MCD) reached a 52-week high of $190.88. MCD is expected to report earnings on Jan. 30, 2019, before market open. Although there might be weakness in the MCD stock price going into the earnings, I regard the company — globally recognized as “the Golden Arches” — as a core consumer staples holding for a well-diversified portfolio.
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McDonald’s operates in the fragmented food service industry, which includes competitors like Restaurant Brands International (NYSE:QSR), Starbucks (NASDAQ:SBUX) and Yum Brands (NYSE:YUM). It has over 36,000 restaurants in over 100 countries.
Company management defines the primary competition as the informal eating out (“IEO”) segment, which includes “quick-service eating establishments, casual dining full-service restaurants, street stalls or kiosks, cafés, 100% home delivery/takeaway providers, specialist coffee shops, self-service cafeterias, and juice/smoothie bars.” Despite the fierce competition in the (IEO) segment, MCD remains one of the most popular brands in the world.
As one of the largest fast food chains around the globe, over 90% of the restaurants are currently franchised. The franchising business gives McDonald’s a significant competitive edge as the initial franchise fees and on-going royalties mean high margins. Its operating margins now stand around a healthy 30%. As the franchisees carry the operating costs and business risks, McDonald’s does not have to worry about the expenses of running those operations.
Even more importantly, the group collects rent from the franchisees as the company owns most of the properties where the restaurants operate. It leases those out to the franchisees, often at significant markups. It may not be wrong to say that the company is in real estate business as much as food services.
Robust Fundamentals
McDonald’s latest earnings results on Oct. 23 came in better than expected. Management gave an upbeat outlook on long-term profitability and credited the increase in global comparable sales with the strength of the numbers. Despite the slowing of U.S. sales, McDonald’s stock has benefited from international growth. Management believes that the value deals to be implemented in the McDonald’s menu globally, but especially in the U.S., will help increase sales numbers.
Going forward, if the Federal Reserve Board (FED) stops increasing the short-term interest rates, there is likely to be continued weakness in the value of the U.S. dollar vis-a-vis other major currencies. I expect McDonald’s earnings to benefit from a weaker U.S. dollar as a significant amount of the earnings come from overseas. When MCD converts its foreign currency income into a weaker dollar, its bottom-line increases. Better profit margins, in return, mean a higher MCD stock price as well as higher dividend payments.
As part of its efforts to improve shareholder value, McDonald’s has been increasing dividend payments since its first-ever dividend payment in 1976. On Dec. 17, MCD paid a quarterly common stock dividend of $1.16 per share, to shareholders of record on Dec. 3. The current dividend yield stands at over 2.5%.
Long-Term Technical Analysis
Over the past year, McDonald’s stock is up 4.7%. The stock’s 52-week price range has been $146.84 (Mar. 2, 2018) — $190.88 (Nov. 29, 2018).
Those investors who pay attention to long-term moving averages should note that the technical message is a “buy,” while oscillators are giving a wider range of “neutral-to-buy” readings. I believe the current long-term positive momentum in MCD stock will continue in the months to come. Within the year, I expect MCD stock to break and stay over the lower $190’s level and even test the $200 level.
What Could Derail MCD Stock in the Short Term?
Since the record Christmas Eve decline in the broader markets, most stocks have had impressive comebacks. And the past month has been profitable for McDonald’s shareholders, too. Therefore a slight pullback toward the higher $170’s level might still occur in MCD stock during the rest of the week as the company gets ready to release quarterly results.
Its short-term support is at $179 and long-term support is at $167. Yet such price weakness before or right after the McDonald’s earnings would offer investors an even better entry point.
The Bottom Line on McDonald’s Stock
I believe that a new leg up in the MCD stock price will be coming in 2019. However, as prudent investors, it is always crucial to maintain a definite risk/return profile. Thus, if the company does not report well on Jan. 30, McDonald’s stock might be stuck in a range between $170 and $190 for several weeks.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
