Let’s take a look.
The stock fell much harder than the broader market did in the virus-induced bear market in March, but unlike some of its peers, it has underperformed on the way back up. McDonald’s is up 34% since its bear market low, against the S&P 500’s 40% rebound. After rallying into its April earnings report, the company met same-store-sales estimates, beat total revenue and missed earnings per share, as the operating margin disappointed due to COVID-related costs and an uptick in selling, general and administrative expenses. And since the end-April report, the stock has essentially gone nowhere, still trading at $184 a share, 15% below its all-time-high of $215.
The calendar year 2020 will be a wash; same-store-sales, total revenue and EPS will all decline, with quarter-over-quarter improvements throughout the year, according to FactSet estimates. Peers like Chipotle (CMG) - Get Report and Restaurant Brands International (QSR) - Get Report (Burger King owner) will see much less severe top-line declines, although the whole group is positioned to rebound to normalized -- or pre-virus -- figures by 2021.
Perhaps a better near-term outlook for McDonald’s peers is enabling investors more confidence in the recovery for those names, which have seen their stocks rebound with vengeance.
And if McDonald’s investors felt have stuck in the mud of late, they’ve got another thing coming. Thursday, McDonald’s said it is pausing store reopening plans for the next 21 days, as coronavirus cases spike throughout the U.S. Some states have already paused reopening plans. This seems temporary and McDonald’s sells throughout the entire globe, but the resumption is dependent on the health issue. While the S&P 500 Equal Weight Consumer Discretionary Index rose about 1% by midday Thursday, McDonald’s was flat-to-down for most of the day.
But the company has a lot going for it, which Wall Street recognizes. And those positive factors are reflected in estimates, but it’s arguable that those estimates are not reflected in the stock.
First off, the stock, more or less, trades off of calendar year 2021 estimates, not the immediate next twelve month's. So it’s trading at 30X expected earnings over the next four quarters, vs. 22X expected earnings for calendar year 2021.
And it’s the 2021 numbers that are “normalized,” or supposedly post-COVID. Same-store-sales are expected to jump 15% in 2021, as pent-up global demand coupled with stimulus sees sales through. It does remain to be seen whether those estimates can be met, as more lockdowns would require more fiscal stimulus. Nonetheless, revenue would get back to its 2019 level of about $21 billion and EPS, aided by a re-expansion of the operating margin, would climb back to its 2019 level of about $8. But if the stock were to trade at the forward one-year multiple it traded at pre-virus (it sat at 25 and the high was 30), it would have to rise from here.
The average price target on Wall Street is $211, reflecting 26 times 2021 EPS multiple and reflecting 14.5% upside.
"We see MCD at current levels as an attractive opportunity,” wrote RBC Capital Markets analyst Christopher Carril, who prices McDonald’s at $220 a share. He uses a multiple on 2021 EPS of roughly $8 of 27 times.
Why the higher multiple? "1) the substantial investments made behind its domestic business (e.g., Experience of the Future, Dynamic Yield) that we expect will continue to drive same store sales momentum; 2) free cash flow that is poised to accelerate as capex begins to decline as EOTF remodels are completed; and 3) an improving long- term earnings growth outlook,” Carril said of why he is so bullish.
And McDonald’s is indeed one of the global leaders in fast food and has commanded a premium valuation vs. many of its peers in recent years. Its digital excellence has seen through a healthy same-store-sales cadence lately and its tech investments have streamlined the customer experience. For the most part, food joints with strong digital sales channels have not seen drastic full-year sales estimate declines. Chipotle’s 2020 same-store-sales will only decline 3%, according to FactSet. “We are confident in current leadership’s ability to guide MCD through disruption and believe overall strategy -- marked by asset base and technological improvements -- will remain intact,” said Carril.
Also, if economic conditions deteriorate materially from here, McDonald’s low price points makes it not as discretionary as the typical restaurant business is, which many analysts, including Carril, point pout.
The point: maybe some near-term turbulence is in the cards, but when the market then readjusts again to a normalized environment, McDonald’s could be a real winner.