McDonald’s stock got on a roll after breaking out in early August, as the oldest of fast-food names proceeded to scarf down its biggest monthly increase in U.S. sales in nearly a decade. Then, earlier this month, Dow Jones stock McDonald’s (MCD) served up its plan to keep the momentum going for the next few years. Bringing back the McRib, debuting the Crispy Chicken Sandwich, launching a MyMcDonalds loyalty program and reviving U.S. restaurant unit growth all are on the menu.
Yet Wall Street’s early response has been lukewarm. Investors expected instant gratification, via slower spending and fatter profits. However, analysts largely endorse the Golden Arches’ strategy to capitalize on its market position that has only gotten stronger during the coronavirus pandemic. So is now a good time to buy McDonald’s stock?
McDonald’s Strategy Update
On Nov. 9, McDonald’s announced its Accelerating the Arches plan to speed up 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 ~$1.2B run rate that was expected” in coming years, wrote BTIG analyst Peter Saleh.
Spending was expected to moderate, after a period of heavy investment in technology and Experience of the Future-themed restaurant remodeling.
“This likely delays the higher free cash flow thesis investors were anticipating by at least two years, so we understand some trepidation but stress it is directly related to long-term sales growth,” Saleh wrote. He kept a buy rating and 245 price target for McDonald’s stock.
McDonald’s Stock Analysis
On Aug. 6, the Dow Jones component cleared a 202.83 buy point from a cup-with-handle base. That breakout sent McDonald’s stock on a 10-week, 14% run to a record high.
A good chunk of the climb for MCD stock came as the broader stock market hit turbulence. That’s pretty typical. McDonald’s is a defensive stock that often performs well when growth stocks falter.
Yet, since McDonald’s stock notched a record high 231.91 on Oct. 16, and now has a flat base with a 232.01 buy point. But its stock chart has some yellow flags. MCD stock fell below its 50-day moving average on Oct. 28 and has yet to retake that line. Meanwhile, its relative strength line, the blue line in IBD charts that tracks a stock’s performance vs. the S&P 500, has fallen close to a two-year low.
On Nov. 9, McDonald’s reported Q3 EPS of $2.22, up 5% from a year ago. Revenue dipped 2% to $5.42 billion amid coronavirus restrictions, particularly in international markets.
Earlier, on Oct. 8, McDonald’s said global same-store sales fell 2.2% from a year ago in Q3, a huge improvement over Q2’s 23.9% plunge.
The latest quarter’s 4.6% comparable sales gain in the U.S. came from larger group orders, especially at dinner. McDonald’s really turned up the heat in September, when comparable sales rose by a low double-digit percentage, with breakfast, lunch and dinner all seeing gains.
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 Q3 comparable-restaurant sales slip 4.4%. Licensed markets, including Japan, China and Latin American, saw sales fall 10.1%.
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McDonald’s Marketing Muscle
McDonald’s is reaping the rewards of its earlier patience amid coronavirus restrictions. Management held off on any big ad campaigns or menu innovations until life began to normalize, then turned aggressive in September.
In a June 16 update, McDonald’s said it would boost ad spending by $200 million to revive sales in the second half of the year, recognizing the cost in the second quarter. U.S. spending on marketing fell 70% in Q2.
McDonald’s attributed September’s double-digit gain for U.S. comparable-restaurant sales to “strategic marketing initiatives such as Spicy Chicken McNuggets and the Travis Scott meal” promotion featuring the rap star.
In the Nov. 9 strategy update, Morgan Flatley, McDonald’s chief marketing officer, said the Travis Scott meal promotion got 29 billion views across social media channels. “We’ve driven massive digital adoption of McDonald’s global mobile app, including significant lifts in registrations and retention. “
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 said it would begin testing its MyMcDonald’s loyalty program in Phoenix soon, with a nationwide launch in 2021.
McDonald’s Ready To Enter The Chicken Wars
On the Nov. 9 update, McDonald’s said its Crispy Chicken Sandwich, with chicken, a potato roll, crinkle-cut pickles, and butter, would launch early in 2021. “Our customers loved it in test, exceeding expectations on key metrics,” said Joe Erlinger, McDonald’s USA president.
McDonald’s franchisees have pushed for a chicken sandwich to help traffic trends, with Chick-fil-A gaining seeing a burst in popularity in recent years.
McDonald’s also introduced its McPlant-brand meatless burger in the Nov. 9 presentation. McDonald’s began testing a Beyond Meat burger in Canada nearly a year ago. Saleh wrote that he doesn’t expect McDonald’s to launch a plant-based burger in the U.S. within the next year.
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.”
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How Does McDonald’s Stock Stack Up Vs. Competition?
The Retail-Restaurants industry group has fallen well below the top tier, ranked No. 124 out of 197 industry groups based on price performance and momentum.
IBD Stock Checkup shows that McDonald’s stock is a step behind the leaders in the Retail-Restaurants group. McDonald’s stock has a subpar 33 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 50 Relative Strength Rating, better than 50% of all stocks, ranks No. 28 in its industry group. By comparison, burger rival Wendy’s (WEN) has a 42 RS rating, Shake Shack (SHAK) is at 83 and Burger King parent Restaurant Brands International (QSR) 38.
Among leading restaurant stocks, Domino’s Pizza (DPZ) has a 50 RS rating, while Wingstop (WING) has a 65 rating. Chipotle Mexican Grill (CMG), an IBD Leaderboard stock, has an 83 RS.
Is McDonald’s Stock A Buy?
McDonald’s still has multiple catalysts ahead, like a chicken sandwich, that could keep Wall Street excited. The Golden Arches also could get a boost from fiscal stimulus and an eventual ebbing of the pandemic.
While McDonald’s seems to be putting in place the right ingredients, it has a history of bland earnings. Meanwhile, McDonald’s stock has a flat base, but is stuck below its 50-day moving average. The RS line shows MCD stock has underperformed the broader market.
Bottom line: McDonald’s stock is not a buy.
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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