Mcdonald’s Corporation’s stock has been struggling since announcing the Q3 earnings report earlier this week. We believe there is a good reason for this pessimism and it is likely to stay that way in the short term.
McDonald’s Corporation (MCD), a California-based fast-food chain, is a drive-thru restaurant turned milkshake and hamburger joint, recognized for its hamburgers, milkshakes, cheeseburgers, french fries, and pies. Founded in 1940, the giant now operates 40,000 locations spanning over 100 countries. McDonald’s innovative business model signifies standardization, efficiency, and franchising, thus ensuring steady growth while preserving uniform quality at each location. The brand value of $222 billion in 2024 has gained McDonald’s an identity as the foremost fast-food brand and the pioneer in breakthroughs like drive-thru service and McCafe.
The core offerings of the giant include a selection of items in burgers and sandwiches, chicken and fish, beverages, desserts and shakes, breakfast, salads, and coffees. The revenue is mainly derived from franchising the brand and leasing properties to franchisees at a significant margin. The proceeds from franchises, contributing the most to the revenue, allow McDonald’s to rapidly expand with limited capital investments. Around 95% of all McDonald’s locations globally are reported to be franchises.
MCD’s leading clients are primarily individual consumers dining at restaurants, families desiring economical dining alternatives, and businesses capitalizing on catering services. The brand has gained popularity among families, adults, and children seeking quick yet affordable food options across a range of settings. This popularity was threatened during the recent global wave of inflation but the company came through strong.
After announcing a healthy earnings report earlier this week, the company continues to beat expectations. However, some headwinds make the stock a bad buy at this point.
Our bearish thesis is driven by the E. Coli outbreak. The outbreak had no impact on the Q3 earnings but Q4 analyst estimates are likely to be lowered. Even though the outbreak is now under control, it will take time for the consumers to return. The fact that most restaurants are looking at improving their market share in a slow year for the restaurant industry is also going to weigh down on the stock. McDonald’s weakness could be seen by others as an opportunity to go aggressive and take their customers.
Another factor that investors shouldn’t forget is the company’s global challenges. In the Middle East, the Israel-Gaza conflict continues to drive negative sentiment while in China, a weak consumer environment is hurting the company’s sales.
McDonald’s has also opened 640 more stores in China, compared to just 36 in the same period last year. This growth is likely to pressurize same-store metrics if the restaurant market stays slow.
In short, several headwinds and uncertainties are likely to keep the share price in check, making the stock a sell in our opinion.
McDonald’s is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 67 hedge fund portfolios held MCD at the end of the second quarter which was 63 in the previous quarter. While we acknowledge the pitfalls of MCD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MCD and trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center