McDonald’s Stock Pushes Onward and Upward With Menu-Tech Acquisition

The fast-food chain's digitization ambitions will drive sales and MCD stock

McDonald’s Corporation (NYSE:MCD) shows early signs of readying for another breakout. Trading close to its 52-week high of $190.88, the food retailer agreed to acquire an Israeli digital startup for around $300 million. This buy should further advance the company’s already-solid implementation of simple store-level technology solutions. With MCD stock valued at 21 times forward earnings, investors may look for McDonald’s to accelerate its revenue growth.

McDonald's Stock Pushes Onward and Upward With Menu-Tech Acquisition
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For a rumored $300 million, McDonald’s is getting personalization and decision-logic technology developed by Dynamic Yield. That tech will enable the fast-food purveyor to more closely match its offerings to what its consumers want. Through an outdoor digital drive-through, customers get a more-immersive, personalized experience from McDonald’s menu items. And by combining the trending food items of the day, time of day, current weather, and current restaurant traffic, the technology will help guide the customer through the decision-making process.

Things have certainly come a long way from “would you like fries with that?”.

Hybrid Brick-and-Mortar

McDonald’s is leveraging its brick-and-mortar retail fronts with the latest technology. What better way to compete with online-only restaurants and other firms that use apps and online channels to take orders ahead of time?

McDonald’s will also integrate this technology into its own mobile app, self-order kiosks, and other digital consumer experience touchpoints.

Ahead of the acquisition news, Cowen had noted that the restaurant chain’s renovations will drive continued revenue growth. With strong earnings and sales on the way, the brokerage views MCD stock as a solid defensive play that is also appealing to fixed-income investors. Though the dividend yield of 2.5% is not high, it’s still better than that offered by Starbucks (NASDAQ:SBUX). Still, The Coca-Cola Company (NYSE:KO) and PepsiCo (NASDAQ:PEP) offer dividends north of 3%. Pepsi is especially attractive because its P/E is 13.8 times, compared to 24 times with MCD stock.

Growth Opportunities

MCD’s 24x P/E is low when investors consider the company’s growth prospects. Restaurant additions, along with the optimization through renovations and promotions, will ensure steady revenue growth. In 2017 and 2018, the stock traded in a range because McDonald’s had only started driving higher traffic growth at its locations. This year, integrating the Dynamic Yield technology and offering UberEATS at most, if not all, of its locations, will fuel higher sales.

The beauty of UberEATS is that it increases consumer awareness for the McDonald’s brand. And once the customer makes that first order, getting repeat business is easier than winning initial business from those customers.

MCD Stock Valuation

Traffic into fast-food restaurants is on the decline, so McDonald’s must differentiate itself from competitors. As more people work from home, the population ages, and habits for eating at fast-food chains change, McDonald’s must continue to adapt. The technology changes will most certainly add meaningfully to the bottom line. Offering delivery and changing the customer experience for the better will also offset the macro headwinds McDonald’s faces.

Analyst sentiment engine shows that of the 11 analysts covering the stock, eight have a buy rating and three others have a hold. The average price target is 6% above the recent share price of around $187. Using to model a fair value for MCD stock with a 5Y DCF growth exit model, assume revenue falls for the next two fiscal years. In this scenario, macro headwinds are hurting all fast-food chains. If revenue recovers in year 5, then McDonald’s stock is trading close to fair value. In this downside scenario, MCD has a fair value that is around 5% below the current share price.

Buying MCD stock today is low risk. The company continues to put its customers at the forefront of growing the business. And few firms ever fail to grow when enhancing the customer experience to drive repeat sales higher. That is the case for McDonald’s stock.

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

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