Some think of McDonald’s (NYSE:MCD) as a recession play. That is, when money is tight and people need something to eat — either for substance or for comfort — the Golden Arches is there. However, McDonald’s stock hasn’t acted in that way.
While some stocks continue to surge to new all-time highs, McDonald’s isn’t one of them. The stock is still down more than 18% from its 2020 high.
However, that doesn’t make it one for investors to pass on. Instead, they should be looking at McDonald’s stock as a buying opportunity. The question they need to ask themselves is, “at what price?”
Sizing Up McDonald’s Stock
Restaurants, fast-casual diners and fast-food operators are forecast to struggle this year. That ranges from Starbucks (NASDAQ:SBUX), Shake Shack (NYSE:SHAK), Wendy’s (NYSE:WEN) and yes, McDonald’s stock.
Analysts forecast earnings to fall 27% this year to $5.69 per share. That’s alongside a 14.4% decline in revenue. That’s really not that bad, particularly when compared to some of its peers.
However, 2021 is forecast to be a rebound year. Consensus expectations call for earnings growth of roughly 40%, along with revenue growth of 15.5%. Like anything, there are positives and negatives with these estimates — and unknowns.
For starters, we don’t know if the novel coronavirus is done wreaking havoc on the economy. If it continues, 2021 estimates will likely need to come down.
It’s good to see earnings estimates for 2021 surpass that of 2019 ($7.92 per share vs. $7.84 per share). While it’s always possible that McDonald’s doesn’t achieve this figure next year, it’s a step in the right direction; it’s a positive. The negative is revenue growth.
Unlike something like 5G — where investment spend will happen regardless of whether it’s delayed — when burger sales dip because restaurants are closed, those sales are gone. No one is buying two Big Macs at their first Mickey D’s stop in May because they were deprived in April.
McDonald’s stock trades at about 30 times this year’s earnings estimate, which is a bit pricey. But it trades at just 22 times 2019 earnings and 2021 estimates once we return to some normalcy. That’s really not a bad price to pay for a high-quality company that yields about 2.8% — particularly when 10-year Treasury yields are at just 0.63%.
Buy the Dip
McDonald’s stock will still be standing when Covid-19 blows over, but that doesn’t mean investors should pay any price for it. It’s not a bad price now, but it doesn’t have the momentum that other stocks do.
Shares couldn’t reclaim the $185 to $190 area. So far, it’s being rejected by this zone, leaving investors to wonder if it can eventually power through or if a larger pullback could be brewing.
Check out the $165 area on the chart above. Technically, this has been a significant level over the past few years. Plus, the rising 200-week moving average comes into play near $161.
In this area, McDonald’s stock will sport a dividend yield north of 3% and trade closer to 20 times 2021 earnings estimates (and 20 times 2019 earnings). It will also give investors a better risk/reward setup with a lower cost basis.
Remember, the stock has not only paid, but raised its dividend for more than four decades. That has been the case since it first started paying its dividend in 1976.
McDonald’s stock isn’t one of the most exciting names out there, let’s be honest. But it’s a high quality, consistent company with a great global business. Management has done a great job pivoting the business back toward growth and investors should consider it an excellent long-term anchor in their portfolio.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.