McDonald’s Value is Down, But You Shouldn’t Count it Out

Shares of McDonald’s Corp. (NYSE: MCD) stock are up more than 3% in early trading after the company announced second-quarter earnings. The early price action is a surprise as the company reported a trifecta that is almost always bearish. It missed analysts’ forecasts for revenue and earnings. And same store sales were down for the first time since Q4 2020 – when the world was still grappling with a global pandemic.  

What makes the news even worse is that the decline in sales came across all of the company’s geographic segments. The company reported that higher prices were insufficient in the United States to offset declining in-store traffic. 

Before the earnings report, MCD stock was within 10% of its 52-week low. That was starting to look like a good value (no pun intended). But as a bellwether among consumer discretionary stocks, how should investors look at MCD stock heading into the back half of the year?   

Value is in the Eye of the Beholder 

If you follow McDonald’s stock or if you’re simply a consumer, you know there’s a debate going on about the company’s value proposition. This isn’t about price-to-earnings, it’s about the price of a Big Mac which, along with other of the company’s most popular food items, is up approximately 20% since 2019.  

The accuracy of that claim will largely depend on where you live. In the last 10 years, McDonald’s has moved to a franchise-heavy business model. This means that many individual locations have some latitude to set their prices depending on their market. 

And according to management, the company is ahead of schedule regarding the rollout of its mobile app. And that’s where consumers can find value pricing including daily deals such as free French fries on select days.  

So why is the fast-food giant still getting criticized for not offering good value? 

On theearnings call management addressed that seeming contradiction by acknowledging that the company’s digital presence via the mobile app, while strong, is not where it needs to be. In fact, currently, only about 25% of consumers use the app.  

The Consumer is Still Under Pressure 

On theearnings call management indicated that the early outlook for the third quarter is for more of what it saw in the second quarter. That could be concerning, considering that the company launched its $5 Value Meal in June. That was never going to dent revenue in the quarter just ended, but it’s concerning that the company is not more bullish about its success.  

However, McDonald’s is planning several promotions in the second half that they believe will drive traffic. Historically, the company sees traffic increase before it shows up in revenue.  

Hold MCD Stock and Wait for Confirmation  

The McDonald’s analyst forecasts on MarketBeat maintain a Moderate Buy rating. And Wedbush quickly reiterated its Outperform rating and $295 price target.  

However, if you’re concerned that you may have missed the dip on MCD stock, the chart suggests you may get a second shot. The price action has moved the stock into overbought territory according to the Relative Strength Indicator (RSI). And, short-term price movement immediately after the market open hints that some institutional investors were expecting the report to be worse than it was.  

That said, I would expect the price of MCD stock to trend lower. This is a consumer story and an inflation story. If a rate cut occurs in September, as forecast, McDonald’s will likely see stronger numbers in the fourth quarter. Until now, long-term investors can snack on a tasty dividend that yields 2.59% and pays out $1.67 per share. That number will likely go up in the next quarter which will make it 49 consecutive years of dividend increases for the company.  

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.