Insights

This Stock Has Monster Momentum — Is It a Buy?

McDonald’s (NYSE: MCD) reported fiscal 2022 second-quarter earnings before markets opened on July 26. Comparable store sales, which exclude the impact of store openings and closings, jumped by 9.7%.

The company adjusted well during the pandemic, emphasizing the digital channel and building a loyalty program. Still, it wasn’t all good news for McDonald’s, which decided to sell its business in Russia because of the invasion of Ukraine. Further, rising costs are biting into restaurant operating margins, necessitating price increases to offset inflation. 

Let’s see what investors should make of the latest results at the Golden Arches.

Consumers like the digital options

In its fiscal second quarter, which ended on June 30, overall revenue at McDonald’s fell by 3% from the same quarter in the prior year. Sales fell despite the increase in comparable store sales due to headwinds from currency fluctuations and the divestiture of its business in Russia. Management noted on the conference call that followed the earnings release that Russia represented 2% of systemwide sales, 7% of revenue, and 2% of operating income.  

Digital systemwide sales surpassed $6 billion in the company’s top six markets. McDonald’s runs on a franchisee business model, and takes a percentage of systemwide sales as revenue. Another force driving sales growth is price increases. McDonald’s CFO Kevin Ozan said the company is experiencing inflation of 13% on food and paper and 10% on labor. To offset the cost pressure, McDonald’s has strategically increased menu prices.  

Typically, when a company increases prices, customers will decrease purchases. So far, McDonald’s says it is not seeing customers recoil at higher prices. That can partly be because competitors are increasing prices faster or because of McDonald’s prices are already lower. Regardless, it’s excellent news for shareholders that McDonald’s implemented price increases without losing customers. 

MCD EPS Diluted (Annual) data by YCharts

Excluding divestment from Russia and currency headwinds, McDonald’s earnings per share increased by 8% from the same quarter a year earlier. That’s impressive considering that McDonald’s reported record earnings per share of $10.04 in 2021. Surpassing those elevated levels in a year when costs have risen more than 10% is commendable.

An excellent business selling at a fair price

It can be reasonable to expect McDonald’s to sustain its excellent momentum over the next several quarters. Inflation is pinching consumers’ budgets worldwide, encouraging them to choose the lower-priced menu items from McDonald’s. Moreover, consumers have grown accustomed to ordering through an app for delivery or pickup. That change in consumer behavior could allow McDonald’s to serve more customers with fewer workers.

MCD Price to Free Cash Flow data by YCharts

The stock is not expensive for investors interested in starting a position. Indeed, trading at a price-to-earnings ratio of 27, the shares of McDonald’s are reasonably priced for this iconic business.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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