NVO - McDonald's Stock: Never This Cheap Since The COVID Pandemic (Rating Upgrade)

2023-10-11 16:30:20 ET

Summary

• McDonald's Corporation has substantial branding advantages, global scale, and cost leadership, leading to best-in-class profitability.
• The company's ability to leverage digitization and technology investments enhances its business model.
• Still, McDonald's nearly fell into a bear market, crashing from its June 2023 highs. As such, McDonald's stock has dropped to levels last seen in October 2022.
• Concerns about the impact of GLP-1 drugs on the restaurant industry and dining habits could affect McDonald's, but its ability to innovate shouldn't be underestimated.
• I argue why investors waiting for a golden buying opportunity shouldn't miss buying the steep pullback. McDonald's Corporation stock hasn't been this cheap since March/April 2020.

The McDonald's Corporation's ( MCD ) investment thesis is pretty simple. It has strong branding advantages, global scale, and cost leadership. Bolstered by an unrivaled franchisee network, it has given the company significant pricing power, allowing it to maintain best-in-class profitability ("A+" grade) among its restaurant industry peers.

In addition, its ability to leverage digitization, technology investments, and omnichannel capabilities further enhances its wide-moat business model. As such, MCD is a resilient long-term uptrend stock that dip buyers have consistently defended on steep pullbacks.

With a "D-" valuation grade , MCD isn't your cheap deal restaurant operator compared to its sector peers. However, like its closest industry peers listed above, wide-moat operators don't come cheap, with Chipotle Mexican Grill ( CMG ) stock assigned an "F" valuation grade. As such, I believe what's important for McDonald's investors to consider is that MCD isn't priced out of this world, requiring significant caution at the current levels.

While its "C-" growth grade could cause some investors to be more cautious, its "A" earnings revisions grade corroborates the company's strong execution, which should support robust buying sentiments.

However, MCD was still battered recently, falling nearly 18% from its June 2023 highs through last week's lows. As such, the $299 level, MCD's critical resistance zone, has proved to be a selling opportunity for astute market operators, rejecting further upside since May 2023.

The recent success of GLP-1 drugs from Novo Nordisk ( NVO ) and Eli Lilly ( LLY ) has likely led to fears about the impact on the long-term prospects of the restaurant industry. These drugs initially used to treat Type-2 diabetes have gained tremendous success and exposure for weight management, anticipated to be a $100B market by 2030.

Wall Street analysts have also expressed concerns about their impact across several industries, including McDonald's and its restaurant peers. Mizuho analysts cautioned that the effects of the GLP-1 drugs are " negative over the long term." As a result, investors should anticipate "reduced spending on dining out."

While these concerns are valid, McDonald's is a value-conscious restaurant that has performed well through economic cycles. However, the imminent threat isn't so much about weaker pricing power but a resurgence of a healthier population that could be more concerned about eating unhealthy fast food.

Could it lead to a structural change in dining habits, particularly at McDonald's? I believe it's still too early to assess. But, we shouldn't rule out McDonald's remarkable ability to innovate and keep itself relevant, as seen in its ability to achieve technological breakthroughs. I wouldn't bet against MCD's wide-moat business model and believe that the recent fear isn't fully substantiated. As such, I assessed that it could represent a remarkable opportunity for investors to capitalize as MCD is no longer expensive relative to its historical metrics.

MCD last traded at a forward EBITDA multiple of 16.2x, above its 10Y average of 15.6x. However, the previous time MCD traded at a lower forward EBITDA multiple was during the early period of the COVID pandemic. In other words, MCD is much cheaper than ever since March/April 2020.

As seen above, for MCD to fall steeply, as it has since its June 2023 highs, isn't a regular occurrence. The previous times it did so, it also bottomed out in March and September 2022, respectively.

Therefore, the decline over the past three months has set up a remarkable dip-buying opportunity for investors who missed buying its previous steep retracements. Accordingly, MCD has dropped back to lows last seen in October 2022, likely stunning investors who anticipated more stability from a resilient stock like MCD.

While I didn't assess a robust price action signal from McDonald's Corporation's pullback, I'm satisfied that the worst selloff is likely over. As such, a more constructive consolidation is expected, with MCD's September 2022 lows likely defended stoutly by buyers.

Rating: Upgraded To Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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