CouldMcDonald's Shares Face Challenges Ahead?
Fast food titan McDonald's (MCD, -0.72%) is facing a downturn as it grapples with an E. coli outbreak at its establishments. Over 90 individuals have reported illnesses, including a single fatality, believed to be linked to contaminated onions used in their burgers.
As the corporation attempts to resolve this issue, investors might find it challenging to regain confidence. Further complicating matters is the stock's premium pricing and doubts surrounding its growth potential.
However, one must consider if the company is truly in turmoil or if this is merely a temporary setback for investors. In this analysis, we examine the extent of concern surrounding McDonald's stock and explore the possibility of this recent slide in value serving as an opportunity for investment.
McDonald's records minimal growth in its latest quarter
Following the release of its third-quarter earnings report on Tuesday, McDonald's financial performance left much to be desired. Revenue for the period ending September 30th increased by a mere 3% year-over-year, totaling $6.9 billion. Conversely, net income experienced a 3% decrease, dropping to $2.3 billion due to rising expenses outpacing revenue growth. U.S. comparable sales saw a marginal increase of 0.3%, while overseas sales saw a 1.5% decrease.
Essentially, the company's performance in this quarter was akin to its performance earlier in the year, when it reported a 1% global decrease in comparable sales, but a slightly improved U.S. market, with a 0.7% decrease in same-store sales.
With the current E. coli outbreak potentially impacting McDonald's sales in the current quarter and beyond, there's a possibility that the company's numbers may worsen.
Investors pay a premium for a sluggish grower
Given the E. coli outbreak, the short-term outlook for McDonald's doesn't appear promising. Although value meals are helping to reattract customers, this strategy could negatively impact gross margins. As a result, even if sales improve, profit growth may not follow at an accelerated pace.
The dilemma is that, with the stock trading at a price-to-earnings multiple of around 26, the business should arguably be performing better for this premium to be justified. By comparison, the average stock on the S&P 500 trades at a multiple of 25.
Although McDonald's stock is not excessively overvalued, it is not an inexpensive investment either. It is currently trading in line with its 10-year average, but slower growth could still make the valuation appear pricey.
Should you invest in McDonald's stock?
The E. coli outbreak has resulted in McDonald's stock losing its yearly gains and returning to its 2024 starting point. Despite this, the stock could still present a worthwhile long-term investment, as economic improvement could bolster demand and enhance future sales.
Additionally, with a growing dividend offering a strong 2.4% yield (higher than the S&P 500's 1.3% average), investors may find an incentive to hold onto the stock despite the recent volatility.
Although McDonald's is not a notable growth stock to invest in, it can make for a dependable income investment to hold. While the company may face challenges in the near future as it tackles the E. coli outbreak, these hurdles should not adversely impact the stock in the long term.
As long as you have a realistic understanding of the company's prospects and acknowledge that it may take time for its recovery from less-than-ideal market conditions and an E. coli outbreak, investing in McDonald's stock could still be a wise decision.
In light of the premium pricing of McDonald's stock and the uncertainties surrounding its growth potential due to the E. coli outbreak and rising expenses, potential investors might want to consider if this is an opportunity for investing in finance.
Given the current premium pricing of McDonald's stock, investors might find it challenging to justify the high price-to-earnings multiple, especially considering its sluggish growth rate.
