McDonald’s stock has been heating up since the oldest of fast-food names launched its Crispy Chicken Sandwich in late February. On Friday, the Dow Jones stock broke out to its first record high in six months, as analysts touted McDonald’s (MCD) business momentum and strengthening competitive position.
In an April 15 note, Cowen analyst Andrew Charles hiked his McDonald’s stock price target to 255 from 250, saying the Crispy Chicken Sandwich will likely turn out to be the Golden Arches’ most successful product launch since Chicken McNuggets in 1983.
On April 16, UBS analyst Dennis Geiger boosted his price target to 255 from 240, writing that buy-rated McDonald’s looks poised for a multiyear period of market-share gains.
Meanwhile, the MyMcDonald’s loyalty program is set to launch nationwide this year, U.S. restaurant unit growth is back on the menu, and overseas operations that have lagged during the pandemic should see a rebound in 2021. So is now a good time to buy McDonald’s stock?
McDonald’s Hits The Accelerator
McDonald’s Feb. 24 Crispy Chicken Sandwich launch followed the Nov. 9 unveiling of its new Accelerating the Arches strategic plan. In addition to strengthening its core menu lineup, McDonald’s announced its plan to step up the pace of investments in new stores and technology.
CFO Kevin Ozan said McDonald’s will spend about $2.3 billion per year in 2021 and 2022, up from $1.6 billion in 2020.
“This outlook is significantly above the (around) $1.2 billion run rate that was expected” in coming years, wrote BTIG analyst Peter Saleh.
Wall Street’s early response to the Golden Arches’ bigger-spending plans was lukewarm. Investors had expected instant gratification, via solid sales gains, moderating outlays and juicier profits. Yet analysts have largely endorsed McDonald’s strategy to capitalize on its market position that has only gotten stronger during the coronavirus pandemic.
The Dow Jones giant’s more aggressive strategy followed September’s double-digit gain for U.S. comparable-restaurant sales, fueled by the successful marketing initiatives such as the Travis Scott meal. The promotion featuring the rap star got 29 billion views across social media channels.
CEO Chris Kempczinski said that the effectiveness of McDonald’s promotions “opens up an opportunity for us to put our foot down (on the accelerator) and to create even greater separation between us and our competitors.”
McDonald’s Stock Analysis
A good chunk of the climb for MCD stock came as the broader stock market hit turbulence. That’s pretty typical. McDonald’s has long been considered a defensive stock and often performs well when growth stocks falter.
After notching a record high 231.91 on Oct. 16, McDonald’s stock pulled back as much as 12.5%, hitting bottom on March 4. However, the rebound has been swift, gaining ground in each of the past seven weeks.
After nosing above a 232.01 buy point on April 6, according to MarketSmith, McDonald’s stock slipped back. But Friday’s 0.8% gain to 233.08 lifted MCD stock back into a buy zone.
Still, a couple of technical factors are on the soft side. Friday’s breakout came on below-average volume. Also, MCD stock’s relative strength line, the blue line in IBD charts that tracks a stock’s performance vs. the S&P 500, has turned lower the past few weeks after bouncing off a two-year low.
McDonald’s has had been going sideways since August 2019. However, MCD stock has had long periods of moving sideways followed by periods of outperforming the broad market. Is this one of those times?
On Jan. 28, McDonald’s reported Q4 EPS of $1.70, down 14% from a year ago. Revenue dipped 2% to $5.31 billion amid coronavirus restrictions, particularly in international markets.
Global same-store sales slipped 1.3%, even as comparable sales rose 5.5% in the U.S. International markets, where drive-thrus are less common, were still recovering from coronavirus closures. Operated and franchised markets, including Australia, France, Germany, Spain and the U.K., saw Q4 comparable-restaurant sales fall 7.4%. Licensed markets, including Japan, China and Latin America, saw sales fall 3.6%.
McDonald’s is scheduled to report Q1 earnings before the stock market opens on April 29.
McDonald’s Technology Investments
Between corporate and franchisee budgets, McDonald’s said it’s investing $1 billion per year in technology initiatives, such as its loyalty program, kiosks and digital ordering and delivery. Speeding up drive-thru times is a major focus.
In March 2019, McDonald’s announced the $300 million acquisition of artificial-intelligence tech company Dynamic Yield. The acquired AI technology is used to optimize drive-thru menus to increase purchases, while boosting efficiency and satisfaction. In September 2019, the Golden Arches announced the acquisition of Apprente, a voice-recognition technology company.
In the strategy update, McDonald’s Senior Vice President Mason Smoot said the company is testing “automated order-taking in the drive-thru.” The technology is intended to make the “ordering process easier, and more streamlined, and crew are freed up to focus on other customer-facing activities.”
Among other initiatives is a drive-thru express lane. “It lets customers using the app skip the line and get their food even faster,” Smoot said. “It may even come to them through a conveyor belt.”
McDonald’s Big Ask From Franchisees
Until recently, McDonald’s sometimes-strained relations with franchisees had been relatively smooth lately, as sales trends improved and corporate management provided extra support amid the pandemic.
But all that changed in December, when McDonald’s emailed franchise operators about an increase in their costs. The new costs, which included a temporary technology fee, shared responsibility for a tuition-support program, and an end to Happy Meal subsidies, amounted to $12,000 per restaurant or $170 million, reported Jonathan Maze of Restaurant Business. he changes.
Corporate management may have to give some ground, which could weigh on near-term cash flows as McDonald’s accelerates its investments.
How Does McDonald’s Stock Stack Up Vs. Competition?
The Retail-Restaurants industry group is ranked No. 71 out of 197 industry groups based on price performance and momentum.
IBD Stock Checkup shows that McDonald’s stock is several steps behind the leaders in the Retail-Restaurants group. McDonald’s stock has a subpar 40 IBD Composite Rating, with 99 the top rating. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
McDonald’s 38 Relative Strength Rating, out of 99, also is uninspiring. By comparison, burger rival Wendy’s (WEN) has a 26 RS rating, Shake Shack (SHAK) is at 89 and Burger King parent Restaurant Brands International (QSR) 43.
Is McDonald’s Stock A Buy?
McDonald’s seems to be putting in place the right ingredients and technology. McDonald’s stock still has multiple catalysts ahead, including the rollout of its loyalty program and revival of international sales, that could keep Wall Street excited.
Management is executing well and McDonald’s earnings are due for a post-Covid rebound. But the fast-food giant has a history of relatively bland earnings and sales growth. That’s hard to overlook when MCD stock’s relative strength line has sagged even as McDonald’s stock broke out to record highs.
Bottom line: McDonald’s stock is a buy. Investors have to realize that this Dow Jones giant isn’t likely to be a huge winner, even if it does embark on a solid run.
As long as the stock market uptrend remains intact per IBD’s daily The Big Picture column, investors may find better buying opportunities in younger, faster-growing companies. To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of the economy and financial markets.
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