McDonald's Stock Jumps 24% In 3 Months: Should You Buy, Sell Or Hold?

McDonald's Corporation MCD has gained 24.2% in the past three months, outperforming the Zacks Retail - Restaurants industry, the Zacks Retail-Wholesale sector and the S&P 500 Index, which rose 20.4%, 10.7% and 7.4%, respectively.

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The company is benefiting from its focus on enhancing customer experiences through its 4D Growth strategy and increased global franchise units. This, alongside an effective capital allocation strategy, has added to the uptrend, given its focus on maintaining shareholder value.
MCD stock has also outperformed some major industry players, including Yum! Brands, Inc. YUM, Domino's Pizza, Inc. DPZ and Wingstop Inc. WING, in the past three months. In the said time frame, YUM and DPZ have rallied 5.9% and 0.5%, respectively, while WING has lost 1.2%.

Factors Driving MCD Stock

4D Growth Pillar: McDonald's continues unraveling new and improved ways to enhance customer experiences and drive growth. One of the company's primary tools to offer customers a more personalized and convenient experience is the 4D Growth Pillar, wherein 4D stands for Digital, Delivery, Drive Thru and Development. The Digital aspect encompasses the company's top-tier loyalty program available on its digital platform, which now has more than 150 million 90-day active users in approximately 50 markets globally.  It anticipates 90-day active users to reach 250 million and annual loyalty system-wide sales to reach $45 billion by 2027.
Regarding the Delivery and Drive Thru aspects, the company offers delivery services through McDelivery or third-party delivery providers in about 100 global markets, which represent more than 85% of its restaurants. Considering drive-thrus under the delivery section, the company houses quite a number of drive-thru locations across the globe, with more than 27,000 drive-thru locations globally. With the increase in delivery sales mix over the past few years, mainly in Australia, Canada and the United States, and leveraging its long-term strategic partnerships with delivery providers, the company aims to offer seamless customer experiences.
Considering the Development aspect, McDonald's is banking on increased demand patterns globally and increasing its foothold by boosting its presence in existing markets and by entering new ones. The company is planning to open more than 2,100 new restaurants globally in 2024, including 500 openings in the United States and International Operated Markets (IOM) segment and 1,600 (including nearly 1000 in China) inaugurations in the International Developmental Licensed (IDL) market. Furthermore, it aims to open 50,000 restaurants by 2027.
Franchised Revenues Offer Stability: Among the total restaurants worldwide of McDonald's, 95% were franchised restaurants as of June 30, 2024. The company operates in three reportable segments, wherein the U.S. segment has about 95% franchised ownership mix, the IOM segment has 89% franchised ownership mix and the IDL segment has 98% franchised ownership mix.
This asset-light business strategy, having more franchised store units across the world, makes its operations less susceptible to market volatility than the company running its outlets on its own. The diversity in market conditions and regulatory hurdles across different nations would make it difficult for MCD to handle operations. This business strategy will offer it higher profit margins and a stable source of revenues. During the first six months of 2024, about 60.5% of revenues came from franchised restaurants.
Effective Capital Allocation Strategy: The company follows an effective capital allocation strategy, wherein it aims to utilize its free cash flow in new business opportunities, dividend payouts and share repurchases. MCD's way of prioritizing shareholder value apart from business investments is encouraging in the industry.
Maintaining its history of increasing dividend payments for 47 consecutive years, McDonald's has again announced a hike in its quarterly cash dividend on Sept. 25, 2024. It raised its quarterly dividend by 6% to $1.77 per share ($7.08 per share annually) from $1.67 per share ($6.68 per share annually). The dividend is to be paid on Dec. 16, 2024 to shareholders as of Dec. 2.

Estimate Trend Favors McDonald's

The Zacks Consensus Estimate for MCD's third-quarter and 2024 earnings per share EPS has trended upward in the past seven days. The uptrend can be witnessed from the chart given below.

EPS Trend

Image Source: Zacks Investment Research

MCD Trading Above 50 & 200-Day SMA

Technical indicators suggest a continued strong performance for McDonald's. From the graphical representation given below, it can be observed that MCD stock is trading above both the 50-day simple moving average SMA and 200-day SMA, signaling a bullish trend. The technical strength underscores positive market sentiment and confidence in MCD's financial health and prospects.

50 & 200-Day Moving Average

Image Source: Zacks Investment Research

MCD Trading at a Discount

McDonald's is currently trading at a discount compared with the industry peers on a forward 12-month price-to-earnings (P/E) ratio basis. The discounted valuation indicates that despite the recent stock price increase in the past three months, it remains an attractive option for investors looking for a suitable entry point.

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Hurdles to MCD's Momentum

The tailwinds discussed above is helping McDonald's to move through the ongoing macro challenges and inflationary risks. However, headwinds like soft comparable store sales and high costs and expenses are pulling back the growth prospects to some extent.
Soft Comps: McDonald's is facing challenges regarding weaker comparable store sales growth. The company's comps are hurt mainly due to negative comparable guest counts witnessed in the U.S. market and negative comparable sales in France witnessed under the IOM segment. The international market's trends are unfavorable since customers are wary of discretionary spending given the ongoing market challenges.
Under the IDL segment, the continued impact of the war in the Middle East and negative comparable sales in China have resulted in declining comps. For the first six months of 2024, comparable sales under this segment decreased 0.8%.
High Cost & Expenses: The persisting inflationary pressures are hurting the company's margins. During the first six months of 2024, the company's total operating costs and expenses escalated 4% year over year to $7 billion due to increased restaurant and occupancy expenses along with selling, general and administrative expenses.
The company anticipates operating margin to remain pressurized in the near term with labor inflation expected to be in the high single digits in 2024.

Is it a Wise Decision to Add MCD to Your Portfolio Now?

As discussed above, despite the ongoing macro hurdles and inflationary risks, McDonald's is gaining momentum in this competitive industry through its top-tier business strategies. The core business strategies of the company highlight its aim of delivering enhanced and personalized customer experiences, making strategic investments in growth opportunities and maintaining a consistent shareholder value.
With the goals set through 2027 and the recent take on the dividend hike, along with increased franchised units, the company seems to be well-positioned to move through the uncertainties and deliver an outperformance in the upcoming period.
Thus, based on the overall discussion and the trends of technical indicators, it is suggested to the existing investors to hold on to this Zacks Rank #3 (Hold) company's shares for now, whereas new investors might want to wait for a more favorable entry point given high costs and weaker comparable store sales growth.

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