Yahoo Finance Pros and Cons of Investing in McDonald's Corporation (MCD) Stock
The golden arches of McDonald's Corporation (NYSE: MCD) is one of the most-recognized corporate symbols in the land, promoting the company's signature sandwiches, Happy Meals and its famous Ronald McDonald mascot.
With a hard-charging CEO and popular new value menu items combating what some industry experts deem a "millennial problem," the nation's leading fast-food chain finds itself in a pitched battle for supremacy in an ever-competitive fast food market.
Can the golden arches lead investors to the proverbial pot of gold? Recent company performance indicates that's a distinctive possibility.
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MCD stock at a glance. McDonald's operates more than 36,900 restaurants in more than 100 countries around the world. CEO Steve Easterbrook has solidified the company's bottom line by reintroducing the value meal with the popular McPick 2, and has rolled out $1, $2, and $3 promotional versions of the value meal, leading to stronger sales and a higher share price.
Since Easterbrook has come on board in January 2015, the company's stock rose 75 percent, outperforming a 33 percent increase for the Standard & Poor's 500 index over the same period.
McDonald's is moving up in a literal sense, too -- the company is moving from Oakbrook, Illinois, to downtown Chicago in 2018, to the former offices of Harpo Productions, helmed by Oprah Winfrey.
Pros of buying MCD stock. With a market capitalization of $137 billion, McDonald's seems reasonably priced with a price-earnings ratio of 26 and a dividend yield of 2.4 percent, says Holmes Osborne, founder of Osborne Global Investors.
Others say that, over the long haul, a new, more balanced restaurant menu can solve McDonald's "millennial" problem, as young consumers opt for more high-end fast-food experiences like Panera Bread Co. (PNRA), Starbucks Corp. ( SBUX) and Shake Shack ( SHAK).
"The Dollar menu is targeted at stretched consumers while the Signature Crafted menu is luring more affluent consumers looking for an affordable splurge," says Dan Roccato, owner of Quaker Wealth Management in Moorestown, New Jersey. "With about two-thirds of sales outside the U.S., MCD gets a nice tailwind from a weaker U.S. dollar."
Performance-wise, McDonald's is picking up steam, and fast.
"MCD is sizzling, up more than 40 percent in the last year," Roccato says. "Sales and profits are being driven by a good global economy and smart menu offerings. Their barbell menu strategy is a hit with consumers."
Cons of buying MCD stock. Getting a grip on younger consumers has proven elusive for McDonald's, and that's a problem. "McDonald's is seeing strong headwinds, with fewer consumers believing that the company's 'bigger is better' business philosophy is a viable concept," says Allen Adamson, co-founder of New York-based Metaforce, and author of "Shift Ahead: How the Best Companies Stay Relevant in a Fast Changing World."
"That's especially so with millennials, who generally aren't on board with McDonald's," Adamson says.
McDonald's has famously implemented a healthier menu, but younger consumers believe its primary meal -- burger, fries and a soda -- is a "headwind" to their health, Adamson says. "The irony is that burgers, fries, and carbonated sugared drinks used to bring consumers into McDonald's and are now actually keeping more health-conscious people out, and that's a resistance problem," he says.
Adamson says McDonald's much vaunted marketing machine is connecting with younger fast-food consumers, and that's a potentially big bottom line issue for the company.
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"McDonald's has always gone big with traditional advertising, and that's worked for them," Adamson says. "But maybe you shouldn't rely on bigger advertising when social media is a better, cheaper option, especially with millennials."
Taken together, those resistance points are a barrier to growth for McDonald's stock. "Yes, McDonald's runs a tight operation, is reaching outside to new customers internationally, and it has a loyal customer base," Adamson says. "But they have hit a wall in the form of lower growth rates. Now, they have fewer levers to growth and Wall Street makes a living backing corporate growth."
Another key area any potential fast food investor needs to flag is store location -- especially new ones, experts say.
Bottom line for MCD stock. A growing global economy and smart management should mean good news for MCD investors -- if not consumer waistlines, Osborne says.
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Free cash flow -- net income plus write-offs such as depreciation, minus money spent on the physical plant and equipment -- will be a big benefit for MCD going forward. "Free cash, which can support McDonald's stock, has been about $4 billion a year over the last few years," Osborne says. "With this cash flow, management can pay dividends, buy back shares, buy other companies, and do other things to increase the stock price."
With a consensus one-year analyst expectation of $189 on MCD stock, there's still room for growth for McDonald's, despite significant headwinds. For now, those headwinds are offset by a robust pick-up in share price that could have investors doing a drive-through on MCD stock.
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