Slowly but surely, normalcy is returning. That’s true, thankfully, for all of us, and it’s true for McDonald’s (NYSE:MCD) as well. Over time, that normalcy will be good news for MCD stock.
Indeed, data provided by the company shows the progress McDonald’s is making. The novel coronavirus still is impacting sales, but the negative effects are fading, particularly in the U.S.
MCD stock too has made progress. Shares have recaptured most of their losses from the panic-selling that struck the market in March.
But they haven’t recaptured all of their losses — and that’s where the opportunity lies.
Again, normalcy is returning, and it will be back in full force at some point. That in turn suggests McDonald’s stock has a path to new all-time highs. Even if that path takes a couple of years, the discount to past levels and a healthy dividend suggest solid returns for patient investors.
And if McDonald’s can capitalize on the disruption in its industry, there’s a chance for significant upside, even after the rally of the past three months.
McDonald’s sales took a big hit from the pandemic. Global same-restaurant sales declined 3.4% in the first quarter. According to the company’s first-quarter earnings call, there was a 22% drop in March.
That March number included a 13% decline in the U.S. The news was worse overseas, where many countries forced restaurants to close, even for drive-thru and takeaway service.
The lower sales are a bigger problem for McDonald’s. Its so-called “refranchising” strategy left the company owning only about 7% of restaurants worldwide at the end of 2019, according to its Form 10-K filed with the U.S. Securities and Exchange Commission. Lost revenue dollars for franchised restaurants thus aren’t offset much by lower costs.
But a release last week shows improvement of late. Global comparable sales worsened to a staggering 39% decline in April, with the U.S. off over 19%. By May, however, the U.S. had improved to -5%, with the global figure rebounding to -21%. As of June 15, 95% of restaurants were open, and that figure should reach 100% in the coming weeks.
What Does That Mean for McDonald’s?
The U.S. figure, in particular, looks exceedingly important. A 5% decline in this environment can only be seen as good news.
After all, it’s important to remember that McDonald’s is the unquestioned leader in quick-service breakfast. That’s why all-day breakfast was such a hit.
On that front, McDonald’s is getting hit twice. Traditional breakfast sales are impacted by a sharply lower number of commuters stopping at restaurants for a coffee and McGriddle. And supply and labor constraints have led the company to temporarily discontinue all-day breakfast items.
Of course, those issues affect the rest of the day as well, as McDonald’s has removed other menu items and loses commuting and after-school sales.
In the context of those multiple headwinds, the May performance is nothing short of impressive. If McDonald’s can roughly maintain volume in this kind of environment, it’s set to impress when normalcy returns.
MCD Stock Will Return to the Highs
That alone creates a simple bull case for MCD stock. In February, MCD traded at $220. It’s now at $187.
Just getting back to those February levels suggests 18% upside. MCD stock also provides a 2.7% dividend yield. Even if the return to past highs takes two years — and I don’t believe it will be that long — investors are seeing annual returns near 12%.
In an environment where 10-year Treasury bonds yield less than 1%, that level of return is attractive. That’s doubly true for a business that for decades has proven its resilience, and is doing so again.
But the news could get even better. McDonald’s may be able to take market share. Unfortunately, we’re going to see a shakeout of smaller restaurants, at least in the medium term. Wendy’s (NASDAQ:WEN) launched its breakfast menu at exactly the wrong time. Its competitive efforts are going to be slowed.
Restaurant Brands International (NYSE:QSR) unit Burger King doesn’t seem to be making any progress on market share. Family friendly casual dining operators like Darden Restaurants (NYSE:DRI) and Brinker International (NYSE:EAT) are going to cede ground.
Simple normalcy is enough for MCD stock to be a buy. But that’s not the most bullish outcome. Once the business rebounds, McDonald’s may be better-positioned than ever. That’s a scary thought for competitors — but a welcome one for investors.
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.