After falling with the lockdown, McDonald’s (NYSE:MCD) stock has recovered its footing and remained strong.
Shares opened July 14 at $185. They are now down just over 5% for the year to date. MCD stock is performing slightly better than rivals Yum! Brands (NYSE:YUM), which owns Taco Bell, and Restaurant Brands International (NYSE:QSR), which owns Burger King and Popeyes.
When the company delivers earnings July 28, analysts are still expecting a profit of 75 cents per share. That’s on revenue of $3.25 billion, down almost 40% from last year’s $5.3 billion. It won’t clear the $1.25 per share dividend, yielding 2.7%. But the chain had almost $5.4 billion in cash at the end of March, after securing additional financing. Experts don’t expect a dividend cut.
If you buy stocks with a 10-year horizon or more, you can buy McDonald’s with confidence. But might you get it cheaper? After all, right now you’re paying 24 times earnings that remain inflated by pre-pandemic numbers.
Strength of the Franchise
McDonald’s has over 36,000 restaurants. Fewer than half, about 14,000, are in the United States. Many are in markets that are now reopening. There are over 2,000 in China, for instance.
McDonald’s is also a franchise, not a chain. According to its corporate website, independent local business owners account for 93% of the restaurants. MCD has been selling these restaurants in large lots to corporate operators. This means McDonald’s can offload risks and maximize profits.
As of late May, the company had set aside only $40 million to help restaurants through the lockdowns. Same-store sales dropped 22% in March, when the lockdowns were global and top executives took a pay cut. Now the company is telling weaker store owners they may just have to sell.
How Will a Second Wave Affect MCD Stock?
A summer wave of infections is impacting restaurants in the U.S.
McDonald’s has learned a few lessons in the first wave of lockdowns. One is that breakfast suffers more amid a pandemic than lunch or dinner. Former CEO Steve Easterbrook used all-day breakfast to help power the stock. When the pandemic hit, about one-quarter of McDonald’s sales were of breakfast items.
Limiting the menu, to reduce food inventory risk, is one of the demands of franchisees during the pandemic. For now, that’s being handled on a market-by-market basis, said CEO Chris Kempczinski. Employees are being screened for illness as they start work.
While some construction is being slowed, remodels under the “Velocity Growth” plan are going ahead. So far 10,000 of the company’s 14,000 U.S. stores have been redone. This can cost up to $750,000 if the building must be replaced. New stores have kiosks, curbside pick-up infrastructure, upgraded drive-thrus and an Uber Eats counter for delivery orders. The company is pressuring franchisees to finish the work by promising to pay half the cost if they do it now, 40% if they do it next year.
McDonald’s is also going ahead with efforts to reduce waste, switching to fiber-based packaging. It recently opened a new store in Disney World that generates some of its own energy.
The Bottom Line on MCD Stock
If you’re buying shares with a 10-year or 20-year time horizon, MCD stock is a good bet.
But if you’re near retirement, worried about short-term capital gains, you’ll find a better price once the severity of the second wave is clear.
If you’re already retired, the dividend should be safe. But it could be interrupted if things really do go south.
Right now McDonald’s is fully valued, and vulnerable to a pullback. However, it looks to have a solid future.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.