Buy McDonald’s Stock Before Shares Bounce Back

The novel coronavirus hasn’t been pretty for the restaurant space. But, for operators like McDonald’s (NYSE:MCD), things aren’t so bad. And that’s clear from the performance of McDonald’s stock price since the late March sell-off. Falling to prices as low as $124.23 per share, the fast food colossus has rallied more than 46%.

Buy McDonald's Stock Before Shares Bounce Back
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With shares trading between $180 and $185 per share, is now a decent entry point? Despite uncertainty, all signs point to yes. Granted, the company posted worse-than expected numbers for the first quarter of 2020. With sales only coming from drive-thru, delivery, and takeout, that’s no surprise. But, social distancing isn’t as much of a death blow to McDonald’s as it is for sit-down restaurant chains.

Even with the company providing support to its franchisees, it has plenty of liquidity to ride out the current storm. And when things “return to normal,” the stock can easily rally back to where it was before the pandemic first hit China. In other words, it’s not a stretch shares could be back to above $220 per share.

In short, there’s plenty of reason to consider McDonald’s stock as markets try to bounce back.

Why ‘I’m Loving It’ With McDonald’s Stock

I can understand why some investors aren’t too keen on MCD stock. As a popular, blue-chip name, shares command a premium valuation. The stock has at a forward price-earnings ratio of 29.6. That’s ahead of valuations for rivals like Restaurant Brands International (NYSE:QSR), which trades for 17.2 times forward earnings. Or Yum Brands (NYSE:YUM), which goes for 28.5 times forward earnings.

Yet, the quality of the McDonald’s business model may justify paying such premium prices. For one thing, the company’s business is almost entirely franchise-based. Franchisees make up 93% of the company’s total restaurants worldwide.

And that’s not all. Not only is McDonald’s generating royalties from this setup. The fast food giant owns most of the real estate for its locations. In short, a large chunk of the company’s revenue comes from rent payments. This makes the company as much a real estate company as it is a franchisor.

But that’s not the only strong point to the company’s business model. This other strength could be key to the company’s rebound as the world recovers from coronavirus.

I’m talking about the drive-thru lane. Right now, drive-thru sales make up 90% of sales. But two-thirds of sales were already coming via the drive-thru before the outbreak. In other words, sales probably haven’t fallen off as badly as with other fast food chains.

Also, consider the rebound factor. Once Americans return to their regular routines, expect traffic to return to prior levels. With people heading back to the office or other obligations, expect them to hit up the drive-thru for a quick bite to eat.

These factors could result in McDonald’s stock returning to its high-water mark sooner than you think. However, there are some risks to keep in mind.

Risks Remain as Franchisees Struggle

As InvestorPlace’s Will Ashworth wrote April 17, the company’s “fortress-like balance sheet” gives them to financial muscle to help out their franchisees during these tough times. This may mean locations don’t shut down due to the coronavirus. But it does point out a potential red flag with McDonald’s stock.

Financial support for franchisees largely means rent deferrals. As I mentioned above, the company is largely a landlord, with 64% of franchise revenue coming from rent. That means while earnings may not fall as much as others, their cash flow may take a big hit until franchisees can catch up with rent payments.

Yet, don’t make mountain out of a molehill. Sure, McDonald’s isn’t out of the woods with coronavirus. But this short-term issue isn’t going to put them out of business. Once we return to a normal operating environment, what’s right now a headwind for the company (revenue model largely built around rent payments) will continue to be a long-term strength.

Bottom Line: Buy Now, Before You Miss Your Chance

Uncertainty remains regarding the coronavirus and “stay-at-home” orders. But we are slowing heading back to a regular routine. Many U.S. states have let their orders expire. In Europe, store reopenings have meant long lines, with some people waiting hours to get their McDonald’s fix.

People have had to make big changes to their habits due to the pandemic. But I don’t see it lasting for long. Pent-up demand is going to help the fast food giant get back to business-as-usual once everything’s reopened again.

And that means shares are likely going to retrace past highs. In short, buy McDonald’s stock now, before it’s too late.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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