With McDonald's Switching to Value Meals, Is Current Period Suitable for Investing in Shares?
Following a period of inflated quick-service restaurant prices, McDonald's (MCD) is doubling down on value meals. During their recent fourth-quarter earnings call, the company casually tossed around terms like "value" and "affordable" over fifty times.
In the face of heightened competition, McDonald's routine strategy is to emerge victorious due to its extensive scale and franchise business model. Let's scrutinize the company's most recent financial performance to evaluate whether now is the perfect time to invest in the stock.
Embracing Value Meals
McDonald's overall Q4 earnings were underwhelming, predominantly due to an early-quarter E.coli scare. Contaminated sliced onions caused the company to withdraw popular Quarter Pounder hamburgers from certain locations, resulting in substantial traffic drops – particularly in affected U.S. states. However, the team quickly identified the source and the Centers for Disease Control and Prevention (CDC) announced the cessation of the outbreak by early December.
U.S. sales dipped during the initial stages of the outbreak before eventually recovering. Overall, the company's U.S. same-store sales fell by 1.4% in the quarter – a relatively decent figure considering the foodborne illness incident. The business recognized a decline in check size, but a marginal positive uptick in customer count also contributed to the numbers.
International markets, on the other hand, demonstrated resilience with a robust 4.1% increase in comparable store sales. This growth was mainly driven by sales in Japan and the Middle East. International company-operated stores saw slightly improved comparable store sales of 0.1%, although there was some weakness in the UK market.
Global same-store sales also showed a modest growth of 0.4% compared to a 3.4% increase the previous year. This performance, better than anticipated, stemmed from an overall revenue of $6.39 billion – a relatively static figure at the quarter's end. The figure narrowly missed the $6.44 billion analyst estimate and resulted in adjusted earnings per share (EPS) dropping by 4% to $2.83, reaching the predicted level.
Moving forward, the company plans to invest between $3 billion and $3.2 billion in new unit development and opening approximately 2,200 new restaurants by 2025. This expansion plan includes the addition of 1,000 new restaurants in China, with the overall unit count projected to grow slightly more than 4% – an addition of 1,800 new units.
The company anticipates an adjusted operating margin above the 46.3% level seen in 2024. However, it expects currency to pose a $0.20 to $0.30 headwind to EPS.
Leaning into Value
McDonald's intends to heavily invest in value meals in 2023 through the launch of its McValue platform in the U.S. in January. Additionally, the company is planning to enhance its value programs in international markets during the first quarter of the year. The strategy has already shown success in parts of Europe with its 4-euro Happy Meal and in the U.S. with the $5 Meal Deal.
When posed a question regarding the impact on gross margins, the company confirmed that these deals stimulate additional purchases and that the average check on $5 Meal Deals surpasses $10. The "Buy one, Add one for $1" promotion has also proved beneficial, contributing positively to overall check transactions.
On the road to a full sales recovery from the E.coli incidents by the beginning of Q2, the company also anticipates improvements in margins compared to 2024 levels. It also plans to introduce new menu innovations in 2023 while expanding its Best Burger initiative in all countries of operation by the end of 2026.
Is McDonald's Stock a Viable Investment?
McDonald's has effectively navigated its E.coli scare, with the fallout on sales being relatively minimal. Although the enduring effects of the incident possibly persist into Q1, the company should experience a swift recovery towards normalcy.
In a period when many consumers bemoan the high prices of quick-service restaurants, McDonald's value meal strategy is a sound move. Historically, the company has gained market share during competing pricing wars at the expense of its competitors in the fast-food burger sector. The combination of value meals to drive traffic and new menu offerings to entice customers into full-priced purchases has proven to be an effective strategy.
Investors should take comfort in McDonald's robust financial performance and robust market position. The company maintains a steady valuation at around a forward price-to-earnings (P/E) ratio of 25 times 2025 analyst estimates – a figure which is in line with historical levels. While the stock may not offer the highest potential returns, it remains a stable long-term investment with ample room for growth.
- Given the current market conditions with inflated quick-service restaurant prices, investing in McDonald's (MCD) stock might be an attractive option, as the company is focusing on affordability and value meals to attract customers.
- McDonald's is allocating substantial funds towards its expansion plan, aiming to open approximately 2,200 new restaurants by 2025, which could potentially lead to higher returns for investors.
- The company's strategy to heavily invest in value meals, as seen with the launch of the McValue platform in the U.S., could largely contribute to preventing a substantial drop in sales during periods of high competitor prices, such as in 2025.
- Valuations of quick-service restaurants, including McDonald's, are a crucial factor to consider when making an investing decision. As of now, McDonald's maintains a steady valuation at a forward price-to-earnings (P/E) ratio of 25 times 2025 analyst estimates, demonstrating its financial strength and potential for growth.
