MCD - Why I Think McDonald's Stock Is A GARP Opportunity

2024-07-02 18:34:27 ET

Summary

• McDonald's had a solid Q1 earnings report with high single-digit YoY operating income growth and 5% YoY revenue growth.
• A resurgence in popularity among Gen-Z consumers along with real operational efficiency improvements have allowed McDonald's to expand margins even amidst a tough macro environment.
• The recent selloff in reaction to slowing comparable sales growth has left shares trading around $250 suggesting a 24% undervaluation in my base-case scenario.
• McDonald's faces market cyclicality risk which could reduce the rate of growth over the coming year as consumers have less disposable income to spend on eating out.
• The long-term outlook remains positive; rating upgraded to Strong Buy.

Investment Thesis

McDonald's Corporation ( MCD ) continues to be one of my favorite stocks at present time despite the surprisingly abundant negative sentiment that appears to be placing downward pressure on shares.

The recent Q1 report saw McDonald's generate solid topline revenue growth along with great operational improvements resulting in a wonderful 8% YoY increase in operating income. While total comparable sales growth did slow to 2% YoY, I believe the softening consumer environment is primarily to blame for this weakness rather than any inherent flaws at the company.

The recent selloff starting in early 2024 has sent shares down almost 25% from highs of almost $300. With little material change to the earnings outlook for FY24, I maintain my IV estimate of $325 and believe shares may be up to 24% undervalued as a result....

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