Will McDonald's (MCD) Big Mac Controversy Drag the Stock Down?

Fast food giant McDonald's Corporation (MCD) has been in the news for all the wrong reasons lately. Its popular Big Mac meal was at the center of the controversy after Twitter user Sam Learner shared a photo of McDonald’s Darien rest stop menu where a Big Mac meal was priced at $17.59, while a Quarter Pounder with cheese meal was $17.99.

Learner also provided the link to the rest stop’s GrubHub online delivery menu, where the prices quoted were even higher. A Big Mac meal would cost a customer $21.59 on GrubHub, while a Double Quarter Pounder with Cheese meal would cost $22.79. These exorbitant prices outraged other users as the meal, which is supposed to be easy on the pocket, is approaching a $20 price tag.

The outrage among customers is palpable as fast-food chains like MCD are popular for their low-priced offerings. However, the prices for MCD’s food items vary across America because 90% of its restaurants are independently owned and operated by franchisees, who can set their own prices. The average Big Mac costs $5.17 in 2023, while it costs $8.29 at the Darian rest stop. Since Learner’s post on Twitter, the stock has declined 0.7%.

MCD recently reported its second-quarter results, comprehensively beating the revenue and EPS estimates. Its revenue was $0.21 billion higher than analyst estimates, while its EPS beat the consensus estimate by $0.38. Its global comparable sales increased by 11.7%, while systemwide sales rose by 12%.

MCD President and CEO Chris Kempczinski said, “Our second quarter results reflect consistently strong execution of our Accelerating the Arches strategy, with global comparable sales growth of 11.7% and double-digit comparable sales growth across each of our segments.”

“While global macroeconomic challenges persist, we continue to invest in our growth drivers and our brand to meet the customer needs of tomorrow,” he added. The company plans to open 1,900 new locations this year, its most significant growth move since 2014.

The stock has gained 13.7% in price over the past nine months and 13.5% over the past year to close the last trading session at $291.75.
Here’s what could influence MCD’s performance in the upcoming months:

Robust Financials

MCD’s revenues from franchised restaurants increased 11.5% year-over-year to $3.93 billion for the second quarter ended June 30, 2023. Its total revenues increased 13.6% year-over-year to $6.50 billion. The company’s non-GAAP net income increased 22.7% year-over-year to $2.32 billion, and its non-GAAP EPS rose 24.3% year-over-year to $3.17.

Favorable Analyst Estimates

Analysts expect MCD’s EPS for fiscal 2023 and 2024 to increase 10.6% and 9.1% year-over-year to $11.17 and $12.19. Its revenue for fiscal 2023 and 2024 is expected to increase 8.4% and 6.7% year-over-year to $25.12 billion and $26.79 billion.

High Profitability

In terms of the trailing-12-month gross profit margin, MCD’s 57.53% is 63.2% higher than the 35.25% industry average. Likewise, its 53.45% trailing-12-month EBITDA margin is 390.5% higher than the industry average of 10.90%. Furthermore, the stock’s 8.55% trailing-12-month Capex/Sales is 163.7% higher than the industry average of 3.24%.

Stretched Valuation

In terms of forward EV/EBITDA, MCD’s 19.35x is 97.7% higher than the 9.78x industry average. Likewise, its 10.32x forward EV/S is 756.4% higher than the 1.21x industry average. Its 26.11x forward non-GAAP P/E is 67% higher than the 15.64x industry average.

Solid Historical Growth

MCD’s EBIT grew at a CAGR of 7.1% over the past three years. Its EBITDA grew at a CAGR of 6.7% over the past three years. In addition, its EPS grew at a CAGR of 6.8% in the same time frame.

Bottomline

Despite the uproar over the higher Big Mac prices, MCD’s stock has remained relatively stable as the prices of Big Mac vary from one location to the other. Higher prices at the Connecticut rest stop do not mean they have been priced higher elsewhere.

Despite the macroeconomic challenges, MCD reported solid growth in its top and bottom lines for the second quarter. The company has bold expansion plans, fueling its growth in the upcoming years.

Despite its stretched valuation, it could be wise to buy the stock now, given its high profitability, robust financials, and solid historical growth.