McDonald's Q2 - Stock NYSE:MCD Comprehensive Stock Analysis

Revenue and Profit Analysis for McDonald's (NYSE:MCD)

Consistency in Revenue Growth

McDonald’s financial results have consistently demonstrated strength in recent years, particularly regarding its revenue streams. The Q2 2023 report revealing revenues of $6.4 billion, marking a 13.62% increase compared to the same period the previous year, builds on this consistency. This growth pattern, taking into account previous revenues of $5.7 billion, is indicative of a positive trend in revenue expansion.

Surge in Net Income

The net income story is also promising. The latest reports for Q2 2023 display a remarkable 94% increase in profits at $2.3 billion, up from $1.1 billion the previous year. When evaluated in a broader time frame from 2019, McDonald's has managed an average annual growth of 6.6%. This consistent and significant growth in profits propels the company into a robust position for future expansion.

A Close Examination of Financial Ratios for McDonald's (NYSE:MCD)

Return on Investment

With a return on investment of 24%, McDonald's is performing exceptionally well, especially for a company with its market tenure. This rate is an indicator of a promising investment.

Debt Ratios and Financial Leverage

Interestingly, McDonald's exhibits a debt ratio of 0. This lack of financial leverage not only stands out but also minimizes the operational risk, giving the company a stable footing.

Dividend Yield and Beta

McDonald’s has a 2.11% annual dividend yield, which lowers the long-term holding risk for investors. Furthermore, with a beta of 0.64, it stands as a low-volatility stock, ideal for diversified, long-term portfolio risk management.

Insider Transactions McDonald's (NYSE:MCD)

Insider Sales

The sale of shares worth US$1.0 million by insider Manuel Steijaert, at a price of $296 each, closely aligns with the current share price of $289. Although insider selling is generally an area of concern, especially at lower prices, the closeness to the current value minimizes the risk associated with this transaction.

Institutional Investment Adjustments

In the investment world, McDonald's saw a 61.5% decrease in holdings by CX Institutional in the first quarter. Other hedge funds, including MBE Wealth Management LLC, First Fiduciary Investment Counsel Inc., and Avantax Advisory Services Inc., have made varying adjustments to their holdings. These activities present a mixed picture but reflect the overall agility in the market for McDonald’s stock.

Market Performance and Analyst Estimates for McDonald's (NYSE:MCD)

Stock Performance

Opening at $291.05 on Wednesday, with a market cap of $212.49 billion, McDonald's is reflecting a stable position. A fifty-day moving average of $291.53 and a two-hundred-day moving average of $282.41 further solidify this stability.

Earnings Per Share (EPS) and Dividend Yield

An EPS of $3.17 for the quarter, beating consensus estimates by $0.40, coupled with a dividend yield of 2.09% and a payout ratio of 55.93%, exhibits strong performance.

A Dive into the Negative Book Value of McDonald's (NYSE:MCD)

Reasons for Negative Book Value

McDonald's shareholders’ equity turning negative at the end of 2016 and remaining so, with an aggressive share buyback strategy, warrants investigation. The company has spent over $62 billion on share buybacks over the past 16 years. This aggressive financial policy had a significant positive impact on the number of shares, leading to a decrease of 39% over the entire period.

Credit Rating Downgrade

The aggressive buyback led to a downgrade in McDonald's long-term credit rating. While this rating downgrade raises concerns, it does not overshadow McDonald's overall strong market position, pricing power, solid product pipeline, and franchise network.

Impact on Balance Sheet and Financial Stability

Mitigating Risks Through Fixed Interest Rates

96% of McDonald's debt (MCD) having a fixed interest rate acts as a safety net against potential fluctuations in market interest rates. This strategic move ensures that the company's interest expenses remain stable, even if interest rates were to rise in the broader market. It offers McDonald's financial flexibility and safeguards it from the unforeseen shocks that variable interest rates might cause.

Franchising Model: A Strategic Lever for Stability

The shift towards an increasingly franchised model has provided McDonald's (MCD) with greater financial stability. This move has allowed the company to delegate many operational risks to franchisees, reducing direct exposure to market uncertainties. The franchising model creates a more predictable revenue stream through royalties and fees, thereby allowing McDonald's to focus on brand building, marketing, and global strategies.

Comprehensive Analysis of Financial Ratios and Key Metrics

Debt-to-Equity Ratio

McDonald's (MCD) debt-to-equity ratio has seen fluctuations in recent years. A comprehensive analysis of this ratio is essential to understand the firm's ability to meet its obligations. Although a higher debt level can lead to a downgrade in credit rating, it is crucial to recognize that McDonald's strategic debt management, such as opting for fixed interest rates, has mitigated some of these risks.

Profit Margin Trends

McDonald's profit margins have displayed resilience despite the aggressive buyback strategy. MCD's sustained ability to generate healthy profit margins showcases the company's efficiency in cost management and its strong pricing power in various markets. A detailed examination of profit margin trends over several quarters offers insights into the company's robustness and adaptability.

Return on Equity (ROE) and Return on Assets (ROA)

The ROE and ROA for McDonald's (MCD) provide a perspective into how effectively the firm is using shareholders' equity and assets to generate profits. A trend analysis of these metrics across different periods highlights the company's financial health and operational efficiency. The stability or growth in these ratios can reveal how well McDonald's is positioned against competitors and in the face of market volatility.

The Role of Dividends and Stock Buybacks

Dividend Policy and Its Impact on Shareholders

McDonald's (MCD) has maintained a consistent dividend policy, which has helped in bolstering shareholder confidence. This commitment to rewarding shareholders, even in turbulent times, underscores MCD's strong cash flow position and its management's confidence in the company's long-term strategy.

Stock Buyback: A Double-Edged Sword

The aggressive stock buyback strategy undertaken by McDonald's has stirred a mixture of reactions. While buybacks can increase earnings per share (EPS) by reducing the number of outstanding shares, there are concerns about the long-term impact on MCD's balance sheet. Some analysts argue that buybacks may be a sign of a lack of better investment opportunities. Thorough scrutiny of the buyback strategy, its timing, and its implications on McDonald's financial metrics is essential to gauge the wisdom behind this approach.

Stock Performance for McDonald's Corporation (MCD)

Recent Trading Activities

McDonald's Corporation (MCD) closed at 288.62 on August 11, showing an uptick of 1.02 or 0.35%. In after-hours trading, it rose further to 289.15, reflecting an additional 0.18% increase. Opening at 287.25, the stock has traded within a day's range of 286.76 - 288.96, making the bid and ask values 288.08 x 800 and 0.00 x 800 respectively.

Annual Trends and 52-Week Performance

With a 52-week range of 230.58 - 299.35, MCD has exhibited noticeable fluctuations. The average trading volume over the past three months stands at 2,420,648, while the total volume for the recorded day was 1,761,803. The market cap is recorded at a robust 210.72 billion USD, with a beta (5Y Monthly) of 0.64, signaling a relatively low volatility compared to the broader market.

Key Financial Ratios

MCD's PE Ratio (TTM) is at 31.00, and the EPS (TTM) is 9.31. The anticipated earnings dates fall between October 25 and 30, 2023. A forward dividend & yield of 6.08 (2.11%) and an ex-dividend date of August 31, 2023, were also reported, with a 1-year target estimate of 300.27.

Valuation and Trading Information

Valuation Metrics

Several key valuation metrics define MCD's market standing, including a market cap (intraday) of 210.34B and an enterprise value of 257.18B. The trailing P/E is 26.60, slightly lower than the forward P/E of 26.67. Other significant measures include the PEG Ratio (5 yr expected) of 2.89, Price/Sales (ttm) at 8.78, Enterprise Value/Revenue of 10.63, and Enterprise Value/EBITDA at 19.54.

Stock Price History and Moving Averages

MCD's 52-week change is impressive at 8.73% compared to the S&P500's 52-week change of 3.88%. Key moving averages, including the 50-day (291.76) and 200-day (279.27), provide insights into the stock's recent trends.

Share Statistics and Short Interest

Share Details and Holdings

The average volumes for 3-month and 10-day periods stand at 2.42M and 2.22M respectively. MCD's outstanding shares amount to 730.09M, with a float of 727.05M. A small percentage is held by insiders (0.21%), while institutions hold a substantial 70.42%.

Short Interest

As of July 30, 2023, shares short were 5.57M, with a short ratio of 2.37, reflecting 0.77% and 0.76% of float and outstanding shares respectively. This represents a decrease from the previous month's 6.52M shorted shares.

Dividends, Splits, and Profitability

Dividends and Splits

MCD's forward and trailing annual dividend rates are 6.08 and 5.94, with yields of 2.11% and 2.07% respectively. The five-year average dividend yield stands at 2.25%, and the payout ratio is 54.75%. A 2:1 split was last recorded on March 7, 1999.

Profit Margins and Operating Margins

Impressive profitability ratios define MCD, with a profit margin of 33.06% and an operating margin (ttm) of 45.89%.

Balance Sheet and Cash Flow

Balance Sheet Dynamics

Total cash (mrq) for MCD is 1.64B, with total debt at 48.56B. The current ratio stands at 1.35, while the negative book value per share is at -6.86.

Cash Flow Statements

The cash flow information includes an operating cash flow (ttm) of 8.73B and levered free cash flow (ttm) of 5.99B.

Earnings Estimates and Growth Projections

MCD Current and Next Quarter Earnings Estimates

The financial landscape for McDonald's Corporation (MCD) looks promising, with the current quarter (ending September 2023) earnings estimates averaging at 2.73. Analysts have provided a low estimate of 2.59 and a high estimate of 2.98 for this period. Meanwhile, the next quarter (ending December 2023) sees a somewhat softer outlook, with an average earnings estimate of 2.55 and a range from 2.44 to 2.76.

The revisions in earnings estimates provide additional insight. The current quarter's average estimate has seen a slight uptick from 2.71 seven days ago to 2.73. Comparatively, 60 and 90 days ago, the average estimates stood at 2.94. This reveals a mixed sentiment among analysts, which could be related to the broader market conditions or specific elements within McDonald's business model.

Annual Earnings Estimates and Projections

For the current year (2023), the average earnings estimate is 10.56, with a low of 10.36 and a high of 11.04. This represents an expected growth of 4.6% compared to the previous year. The following year (2024) also shows promise, with earnings expected to reach an average of 11.35, representing a further growth of 7.5%.

Over the next five years, McDonald's is expected to experience a growth rate of 8.39% per annum. The growth estimates clearly depict a company in a stable position, poised for consistent growth, though it is important to consider the broader industry and economic factors that may influence these projections.

Stock Price and Trading Information

MCD Stock Price Details

McDonald's Corporation's stock price has demonstrated resilience and growth, closing at 288.62 on August 11, 2023, a rise of 0.35%. After hours trading pushed it slightly higher to 289.15. The stock's 52-week range has seen it move between 230.58 and 299.35, indicating a strong performance overall, with a 52-week change of 8.73%, outperforming the S&P500's 52-week change of 3.88%.

MCD's Trading Volume and Averages

The trading volume for McDonald's stands at 1,761,803, which is below the 3-month average volume of 2.42 million. This could be indicative of a stable holding pattern among investors. The 50-Day Moving Average is at 291.76, and the 200-Day Moving Average is at 279.27, providing further evidence of the stock's upward momentum.

Share Statistics and Ownership

MCD's Share Dynamics

McDonald's has 730.09 million shares outstanding with a float of 727.05 million. The insider holdings are minimal, constituting only 0.21%, whereas institutions hold 70.42% of the stock.

Short Interest in MCD As of July 30, 2023, the short interest in McDonald's stock was 5.57 million shares, or 0.76% of shares outstanding. This is down from 6.52 million in the prior month. A relatively low short interest coupled with a short ratio of 2.37 suggests that the market sentiment leans positive, with minimal bearish outlook on the stock.

Dividends and Splits

Dividend Information for MCD

Investors looking for consistent returns will appreciate McDonald's dividend policy. The forward annual dividend rate stands at 6.08, with a yield of 2.11%. The trailing annual dividend rate is 5.94, and the 5-year average dividend yield is 2.25%. With a payout ratio of 54.75%, McDonald's exhibits a strong commitment to rewarding shareholders while maintaining sufficient capital for growth and development.

Stock Split History

The last split occurred on March 7, 1999, with a 2:1 ratio. This history is indicative of a company that has previously used stock splits as a tool for increasing liquidity and broadening its investor base but has not found the need for such an action in recent years.

McDonald's Q2 2023 Performance Analysis

Global Comparable Sales: A Robust Growth Picture

The Q2 report reflects a robust performance by McDonald's with an impressive global comparable sales growth of 11.7%. This growth showcases strength across various segments, with double-digit growth in all key areas.

• U.S. Sales Growth: The 10.3% increase in the U.S. market was spearheaded by strategic menu pricing adjustments and positive guest count. Continued digital and delivery growth, along with culturally relevant marketing campaigns, have been the catalyst for strong comparable sales in this region.

• International Operated Markets Growth: With an increase of 11.9%, international operated markets exhibited strength, primarily driven by significant performance in the U.K. and Germany.

• International Developmental Licensed Markets Growth: A remarkable growth rate of 14% in the international developmental licensed markets, led by China, demonstrates McDonald's (MCD) expansion and acceptance in emerging markets.

Digital Systemwide Sales: A Key Driver

Digital systemwide sales in McDonald's top six markets were over $8 billion for Q2 2023, making up almost 40% of their systemwide sales. This figure signifies the strategic importance of digital sales channels and how they are shaping the future revenue model of McDonald's.

Financial Performance: In-Depth Examination

Revenue Growth:

McDonald's (MCD) witnessed consolidated revenues increase by 14% (14% in constant currencies), indicating strong sales momentum.

Operating Income:

An 81% increase in consolidated operating income (82% in constant currencies) reflects efficiency in operations. This figure includes restructuring charges related to modernizing McDonald's internal processes, termed "Accelerating the Organization." Excluding these and prior year pre-tax charges, consolidated operating income increased by 20% (21% in constant currencies).

Earnings Per Share (EPS):

McDonald's (MCD) diluted earnings per share rose by an impressive 97% (98% in constant currencies). The adjusted figure, excluding restructuring charges and other factors, was $3.17, up 24% (25% in constant currencies). This substantial increase reflects effective capital management and operational efficiency.

Analysis of Special Items

Pre-Tax Restructuring Charges:

For Q2 2023, the company incurred pre-tax restructuring charges of $18 million, primarily related to "Accelerating the Organization." This move indicates an ongoing commitment to modernize and streamline the company's operational structure.

Past Charges and Gains:

Including the pre-tax charges related to the sale of the company's business in Russia and the sale of its Dynamic Yield business, as well as the non-operating expense related to a tax audit settlement in France.

Six Months Performance Snapshot

Sales Performance:

McDonald's reported a revenue increment of 9% to $12,395.3 million, with a 7% increase in sales by company-operated restaurants and an 11% increase in revenues from franchised restaurants.

Operating Income and Net Income:

Operating income increased by 40%, while net income surged by 79%. These numbers reflect McDonald's ability to translate sales growth into profitability.

Earnings Per Share (EPS):

A notable 82% increase in diluted EPS underscores the effective utilization of capital and demonstrates a strong return for shareholders.

0.21% of the shares, while institutional ownership makes up a substantial 70.42%. These figures indicate a broader distribution among investment professionals, adding to the stability of the stock.

Short Interest and Implications

A short interest of 5.57 million shares as of July 30, 2023, indicates a small bearish sentiment. However, with the decrease from the previous month's 6.52 million shorted shares, it seems that the bearish sentiment is diminishing. The relatively low short ratio of 2.37 reveals that the market does not anticipate a significant downward pressure on the stock in the near term.

Analysis

Dividends and Profitability: A Robust Outlook

Dividend Distribution McDonald's has shown a steady commitment to its shareholders through regular dividends, with forward and trailing annual dividend rates of 6.08 and 5.94, yielding 2.11% and 2.07% respectively. The five-year average dividend yield of 2.25% and the payout ratio of 54.75% signal that the company's management has a balanced approach to returning value to shareholders while maintaining sufficient capital for growth.

Profit Margins: A Sign of Efficiency MCD's high profit margin of 33.06% and operating margin of 45.89% underscore the company's ability to manage costs and create value. These figures demonstrate efficiency and provide confidence in the sustainability of the company's revenue streams.

Balance Sheet and Cash Flow: A Comprehensive Overview 

Balance Sheet Stability With total cash of $1.64 billion and total debt at $48.56 billion, McDonald's maintains a current ratio of 1.35. Despite the negative book value per share of -6.86, the company's fixed interest rate strategy and strong cash position present a stable financial picture.

Cash Flow and Investment Potential Operating cash flow of $8.73 billion and levered free cash flow of $5.99 billion give McDonald's significant liquidity and investment potential. These figures align with the overall strategy of growth and reward to shareholders through dividends and stock buybacks.

Future Growth and Earnings Projections

Short-Term Earnings Prospects The mixed revisions in earnings estimates for the current and next quarter reveal varied sentiments among analysts. The slight upward adjustment in current quarter estimates, coupled with historical beats on earnings, may signal a cautiously optimistic outlook.

Long-Term Growth and Stability Annual earnings growth projections of 4.6% for 2023 and 7.5% for 2024, along with the anticipated 8.39% growth rate over the next five years, depict a well-positioned company. McDonald's is not just holding steady but also primed for consistent growth, reflecting robust business strategies and market leadership.

Conclusion: A Balanced Investment Prospect

McDonald's Corporation offers a balanced and promising investment picture. Its resilience in profit margins, consistent growth in revenue, stable dividend policy, and prudent financial management makes it an attractive prospect for diversified portfolios.

The company's strategic shift towards an increasingly franchised model, the safety net provided through fixed interest rates, and the efficiency in cost management collectively make a strong case for long-term investment.

While the aggressive buyback strategy and the associated negative book value warrant scrutiny, these factors do not overshadow McDonald's strong market position, franchise network, and robust product pipeline.

Investors looking for a low-volatility stock with consistent growth and a fair dividend yield would find McDonald's to be a compelling choice. Its past performance, coupled with strategic planning, offers confidence in its future potential.

With global reach and a brand synonymous with quick-service dining, McDonald's continues to be a force in the marketplace. It showcases adaptability, innovative leadership, and a deep understanding of consumer needs and market dynamics.

In an ever-changing economic environment, McDonald's remains a solid investment, displaying the classic characteristics of a blue-chip stock with the agility to navigate modern market challenges. The investment community's broad participation, coupled with favorable analyst ratings, adds to the confidence in McDonald's as a strong investment contender in the fast-food industry.
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