On Apr. 8, McDonald’s (NYSE:MCD) provided a Covid-19 update along with its comparable store sales data for the first quarter. The fact that it was able to eke out a 0.1% increase in U.S. same-store sales in the first three months of the year is pretty remarkable.
Unfortunately, the company’s business in the U.S. and elsewhere is going to get worse before it gets better. This reality, combined with the fact the economy is set to crater in Q2, means its stock price is likely to fall further in the weeks ahead.
Despite the fact that the Golden Arches is struggling like most restaurant chains, large and small, McDonald’s remains the gold standard of restaurant stocks.
Here’s why.
Cash Flow and Balance Sheet
Investors have watched as company after company has drawn down their revolving credit facilities to ensure their businesses are able to restart once the country gets back to work.
In McDonald’s case, to conserve cash, it has suspended all share repurchases and raised $6.5 billion of debt in Q1 to tide it over. In addition, it will scale back on store openings and capital expenditures in 2020.
At the end of December, McDonald’s had $899 million in cash on its balance sheet. It also had all of its $3.5 billion line of credit available if needed. That, along with the $6.5 billion it raised from debt markets in the first quarter, gives it $10.9 billion in cash.
Lastly, the company’s total debt obligations at the end of 2019 were $34.2 billion, with an average interest rate of 3.2%. That works out to $1.1 billion in interest annually.
McDonald’s has built itself a nice fortress to hold off the economic hit its business will take as a result of the coronavirus.
It’s Not All Bad News
Approximately 75% of McDonald’s restaurants around the world, including 99% in the U.S., are generating sales from drive-thru, delivery and take-away orders. Further, in January and February, McDonald’s same-store sales grew 8% year-over-year in the U.S. and 7% overseas.
Once everything gets back to normal many months from now, I have no doubt McDonald’s business will be ready to continue its strong showing in the quick-service restaurant market.
Unfortunately, in strong growth markets such as France and the UK, its restaurants are shut entirely, unable to generate sales. That’s going to show up in the company’s first- and second-quarter results. And even though many of its restaurants were able to function, the mass closures really took its toll on March’s results.
The company’s U.S. same-store sales declined by 13.4% YOY in March, while its international stores delivered a 34.7% decline. Overall, same-store sales tumbled 22% in March. I wouldn’t be surprised if April’s results are even worse.
At the end of the day, while drive-thru, delivery and take-away services can reduce the hit to the company’s business, not even McDonald’s can escape the significant damage the coronavirus is doing to the economy.
As I’ve said, McDonald’s is doing all it can to deal with this situation, including getting as much aid to its franchisees as is possible.
“The Company is working with franchisees around the world to support financial liquidity during this period of uncertainty. The Company has granted the deferral of cash collection for certain rent and royalties earned from franchisees in substantially all markets. The extent of the deferrals may differ in length by market,” McDonald’s stated in its Apr. 8 press release.
While I’m sure franchisees need more, it’s a start. And McDonald’s wouldn’t have been able to do that much if it didn’t have a fortress-like balance sheet.
The Bottom Line on McDonald’s Stock
The S&P 500 is currently trading at 2,772.56 as I write this. Market strategist Cam Hui published an article in MarketWatch on Apr. 14 that suggests the index could go as low as 1,275 before a bull market can emerge.
That means investors have plenty of time to buy McDonald’s stock. The shares have fallen 8% this year, but the worst of the devastation from coronavirus has yet to be felt.
In March, the shares were trading below $140. I would recommend waiting for the stock to return to that level before buying it. However, the Golden Arches is the restaurant stock to own over the long haul.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
