McDonald’s (NYSE:MCD) has been one of the most consistent stocks in the market. Shares continue to chug higher, as growth is steady and business is consistent. Gone are the worries about McDonald’s impending doom amid a generational shift in eaters’ preferences. MCD stock is not only surviving in the current environment but thriving.
Can it continue to do so? Certainly, but maybe not just right now.
MCD is one of those unique companies that does well in good times and bad. Plenty of others do well in good times but struggle when the economy turns south. Think of names like Ford (NYSE:F) or Carnival Cruises (NYSE:CCL), or even speaking more broadly like housing.
But at the end of the day, people need to eat. And while McDonald’s may not have the healthiest options, it’s something for customers to put in their belly.
Guess what though? When times are good, people still need to eat! That’s what makes MCD stock such an appetizing investment. After rallying 24% over the past year and more than 85% in the past three years though, investors will need to decide if it’s worth chasing or if they should take a pass and wait for another opportunity.
McDonald’s Pre-Earnings
When McDonald’sreports its third-quarter results on Tuesday, Oct, 22, analysts will be looking for earnings of $2.21 per share on sales of $5.49 billion. In-line results will represent growth of 5.2% and 2.3%, respectively.
However, for its valuation, McDonald’s stock certainly does not sport robust growth. For the year, analysts are looking for revenue growth of just 40 basis points to $21.1 billion. On the earnings front, estimates call for 1.4% growth to $8.01 per share.
That leaves shares valued at just under 26 times earnings for essentially flat growth. Of course, management could also serve up a beat-and-raise quarter, but as it currently stands, this is where we’re at.
With an elevated valuation and low growth, I generally am more cautious. In the case of MCD stock though, at least the stock has started to relax on its own. After topping out in August near $221, MCD has been chopping lower for several months. Unfortunately, that makes the decision even harder.
What now?
Trading McDonald’s Stock
Click to Enlarge
A look at the chart above highlights plenty of information. First, McDonald’s stock consolidated for quite some in Q4 2018 and Q1 2019. Once it broke out at the end of March, shares went on a prolonged rally.
Shares eventually topped out just over $220, where a thick level of resistance has become evident. With its fall in September, MCD stock eventually stabilized near $207. This mark has become solid support and has played a significant role in MCD’s price action since June.
A few more observations: McDonald’s stock is still below 50-day and 100-day moving averages, as well as its 78.6% retracement. Shares continue to make a series of lower highs too (purple line).
As these rallies fizzle out faster and faster, they continue to squeeze MCD against a static level of support (the $207 level). That’s a bearish setup known as a descending triangle.
Does this mean earnings are going to send shares lower?
Not necessarily. While earnings can certainly be the catalyst that confirms the technical setup, it can also be what breaks the stock out of its technical pattern. That’s why blending technicals and fundamentals has become so important.
In the case of McDonald’s stock, we’ll have to see how shares react to the report. On a rally, look for MCD stock to clear $214. That puts it over the 78.6% retracement and the 50-day and 100-day moving averages. In that event, it puts $221 resistance on the table.
On a move below $206.50, and investors will be looking for support from the 61.8% retracement and the 200-day moving average.
Bottom Line on MCD Stock
McDonald’s is an incredibly well-run company. It’s also a dividend stud, not only paying but raising its quarterly payout for 43 straight years. In September, it gave the dividend an 8% boost, as it now yields 2.4%.
Only down ~6% from its highs though, and some investors may prefer to wait for a larger decline. At roughly $200 per share, the stock will be down 10% and yield 2.5%. Others may prefer to buy a partial stake now, that way they own a piece of MCD in the event of a rally and can add to their position on a post-earnings decline.
The answer will differ for each individual investor.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
