McDonald's Corporation
Key idea's supporting arguments:
• The decline in stock prices presents an excellent opportunity to open new positions.
• The company aims to enhance its value proposition by offering reasonably priced meals and modernizing its stores.
• The company’s valuations appear to be moderately positive.
Investment thesis
• Causes of the Recent Decline. McDonald’s shares dropped on Wednesday following a report from the Centers for Disease Control and Prevention about an investigation into an E. coli outbreak linked to burgers sold at McDonald’s in 10 states. NBC News reports that about 50 people have fallen ill, with 10 hospitalized and one elderly person with multiple medical conditions having died. The investigation is ongoing; however, McDonald’s has tentatively identified chopped onions added to the quarter-pound burger as the source of the outbreak (other burgers use different types of onions). Preliminary evidence from the FDA suggests that Taylor Farms might be the supplier of the contaminated onions. Historically, E. coli outbreaks affect a number of people, typically ranging from a few dozen to a few hundred (with a notable case involving a few thousand people in Germany). Considering this, we expect a transient impact on attendance and financial performance. So, other factors driving MCD should be considered.
• Local Demand Momentum. After weak traffic in the second quarter of 2024, market estimates for comparable sales in the third quarter have slightly improved, moving to -0.6% currently from -0.8% at the end of September. We believe that management will continue to focus on maintaining market positions in the short term. For instance, the $5 (four-component) offer has been extended to December, and temporary promotions like Boo Buckets and Crocs Happy Meal have been announced recently. It is also important to note that the market, based on consensus forecasts, anticipates the momentum of capital expenditure growth to continue into 2025 (+9.6% y/y) and 2026 (+17.2%). Part of these expenditures will be dedicated to opening new restaurants, with the company’s forecast assuming an increase from 41k restaurants in 2023 to 50k by 2027. The rest will be used to modernize existing locations, which could enhance the value proposition for customers. Additionally, there is market speculation about McDonald’s creating a permanent reduced-price offering and reintroducing menu items like the Snack Wrap in 2025.
• Valuations. The company’s valuation is neutrally positive, with a forward P/E multiple of 24, compared to the 5-year average of 24.7.
• Technical Outlook. Technically, the situation is favorable for growth: the $297-$301 range served as a resistance zone, and if the stock price remains above this level, a continued ascending trend can be expected.
The target price for the stock is $338, the recommendation is ‘Buy’. Stop-loss is recommended to be set at $277.
• The decline in stock prices presents an excellent opportunity to open new positions.
• The company aims to enhance its value proposition by offering reasonably priced meals and modernizing its stores.
• The company’s valuations appear to be moderately positive.
Investment thesis
• Causes of the Recent Decline. McDonald’s shares dropped on Wednesday following a report from the Centers for Disease Control and Prevention about an investigation into an E. coli outbreak linked to burgers sold at McDonald’s in 10 states. NBC News reports that about 50 people have fallen ill, with 10 hospitalized and one elderly person with multiple medical conditions having died. The investigation is ongoing; however, McDonald’s has tentatively identified chopped onions added to the quarter-pound burger as the source of the outbreak (other burgers use different types of onions). Preliminary evidence from the FDA suggests that Taylor Farms might be the supplier of the contaminated onions. Historically, E. coli outbreaks affect a number of people, typically ranging from a few dozen to a few hundred (with a notable case involving a few thousand people in Germany). Considering this, we expect a transient impact on attendance and financial performance. So, other factors driving MCD should be considered.
• Local Demand Momentum. After weak traffic in the second quarter of 2024, market estimates for comparable sales in the third quarter have slightly improved, moving to -0.6% currently from -0.8% at the end of September. We believe that management will continue to focus on maintaining market positions in the short term. For instance, the $5 (four-component) offer has been extended to December, and temporary promotions like Boo Buckets and Crocs Happy Meal have been announced recently. It is also important to note that the market, based on consensus forecasts, anticipates the momentum of capital expenditure growth to continue into 2025 (+9.6% y/y) and 2026 (+17.2%). Part of these expenditures will be dedicated to opening new restaurants, with the company’s forecast assuming an increase from 41k restaurants in 2023 to 50k by 2027. The rest will be used to modernize existing locations, which could enhance the value proposition for customers. Additionally, there is market speculation about McDonald’s creating a permanent reduced-price offering and reintroducing menu items like the Snack Wrap in 2025.
• Valuations. The company’s valuation is neutrally positive, with a forward P/E multiple of 24, compared to the 5-year average of 24.7.
• Technical Outlook. Technically, the situation is favorable for growth: the $297-$301 range served as a resistance zone, and if the stock price remains above this level, a continued ascending trend can be expected.
The target price for the stock is $338, the recommendation is ‘Buy’. Stop-loss is recommended to be set at $277.
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