As the COVID-19 pandemic continues to affect our daily lives and the U.S. economy, investors are wondering if they should buy into shares of restaurant stocks in the second quarter. Year-to-date McDonald’s (NYSE:MCD) stock is down about 18.2%.
That decline compares to a 25% drop in the Consumer Discretionary Select Sector SPDR Fund (NYSEArca:XLY), which includes MCD as its third-largest holding at 7.39% of the portfolio, behind Amazon (NSADAQ:AMZN) at a whopping 24.1% and Home Depot (NYSE:HD) at 12% of the exchange-traded fund’s assets.
Despite the recent rapid decline, I expect the short-term volatility in MCD stock to continue. However, those investors with a two-to-three-year horizon may consider further dips as opportunity to buy into the shares.
How the Pandemic is Affecting the Golden Arches Globally
McDonald has more than 38,000 restaurants in over 100 countries. Its largest segment is the U.S.
Next is its International Lead Markets segment, i.e., established markets including Australia, Canada, France, Germany and the U.K. And then comes its High Growth Markets, including China, Italy, Korea, the Netherlands, Poland, Russia, Spain and Switzerland.
Management is also likely to offer some franchisees rent deferrals. About 90% of the restaurants are currently franchised. As these 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. Therefore rent deferrals would likely affect McDonald’s earnings.
At present much of Europe is under a lockdown. And many businesses have either been ordered to shut down or have themselves decided to cease operations for now.
For example, as of March 23, all McDonald’s stores in the U.K. and Republic of Ireland have been closed indefinitely. Similar closures are also continuing in France, Italy and Spain. And in late January management had closed hundreds of stores in China, where the novel coronavirus had initially started.
What to Expect from Q1 Earnings
The company is likely to announce Q1 results in late April.
Its Q4 earnings, released in January, topped analysts’ estimates. Quarterly revenue $5.3 billion fueled earnings per share of $1.97. Earnings got a boost from price hikes.
U.S. same-store sales climbed 5.1% during Q4, despite traffic to restaurants falling by 1.9% in 2019. The company also reported global same-store sales growth of 5.9%.
Overall, the results showed that the group is a consistent performer. It is also a profitable business with strong cash flows.
But then came March when we started seeing the novel coronavirus become a global pandemic. And on March 17, MCD management said that it would not yet be able to fully assess the impact of the viral outbreak. 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).
And shares of McDonald’s as well as its peers have been suffering in recent weeks. In March alone, both MCD and SBUX were down 15% while QSR and YUM shares were down about 28% and 23%, respectively.
Given the uncertainty not just in the U.S., but also in other countries, many investors are understandably quite anxious to analyze MCD stock’s quarterly results in several weeks.
Recent Price Action of MCD Stock
On Aug. 9, 2019, MCD stock price saw an all-time high of $221.93. And on March 18, 2020 came the 52-week low of $124.23. The shares are now hovering around $162.
Over the past year, the shares are down about 12%. If you’re an investor who also pays attention to technical charts, you may be interested to know that the recent price action means that it’ll likely take time for McDonald’s stock price to settle. It’d need to build a base before a new sustained up move could start.
In the coming weeks, I expect it to trade mostly between $150 and $175. The price may become even choppier around the earnings release date.
If you currently hold MCD stock, depending on your risk/return profile, you may want to ride out the short-term volatility.
Alternatively, if you’re experienced with options, you may want to initiate a covered call position. For example, a May 15-expiry ATM call would provide some protection in case McDonald’s stock falls further. It’s also enable you to participate in a potential up move between now and mid-May.
Recent research by Sandip Dutta and Vignesh Prabhu of Clemson University on company stock prices in times of recession and recovery highlights that a “franchised company like MCD shows … resilience and holds the stock price steady even in the average market meltdown.”
If history is any guide, McDonald’s shares should be able to weather a prolonged downturn in the economy better than many other stocks.
Investor Takeaway on MCD Stock
It’d be no exaggeration to say that we’re living in unprecedented times. And in recent weeks, share prices of most stocks, including the usual investor darlings like McDonald’s, have been falling hard and fast.
Your guess may indeed be as good as any other as to when most stocks will likely hit the bottom in 2020. Nonetheless, if you liked a company for solid fundamental reasons before its price went down double digits, then you should possibly like it even more now.
Although there might still be some more short-term pain in MCD stock, long-term investors may consider buying the dip in McDonald’s shares. I find the stock price attractive as it falls toward $150. Shareholders would also be entitled to the current dividend yield of about 3.1%.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.