On October 1, during the episode of Mad Money, Jim Cramer mentioned an opportunity in McDonald’s Corporation (NYSE:MCD) after its sharp decline. Explaining what happened, he said, “Management came in with a big plan to transform the business and the Street shot it down.”
Read more to find out which $3.85 billion stock Cramer said is “better” than McDonald’s.
McDonald’s is Betting Billions on a Turnaround
McDonald’s Corporation’s NEXT strategy calls for approximately $8.5 billion of support for franchisees through 2036, including approximately $5 billion through 2030. Cramer said:
To help cover the cost for franchisees, McDonald’s is planning $8.5 billion of capital support and rent relief through 2036, including about $5 billion by 2030. That’s not going to be cheap for the shareholders, but it’s a good thing. Is it fast, though? Management indicated that roughly 70% of US restaurants could come through that cycle over the next four years. The updated design could become standard for new restaurants in the first quarter of 2028…
The problem is McDonald’s is all about the franchises, which means they need to wrangle thousands of individual owners before they can make big changes. And the franchises won’t get on board if they don’t think the potential returns justify the near-term disruption. At this point, it might be an uphill battle. Not sure if they got everybody’s buy-in.
That execution challenge is significant because McDonald’s relies heavily on independent franchisees to implement the changes.
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Value and Technology Are Important to the Fix
Cramer believes McDonald’s Corporation damaged its value proposition by pulling back promotions while customers remained focused on affordability, as he said:
Then there’s value, an important area where management admits that they’ve been slow to adapt. US same-store sales rose just 0.8% in the second quarter with higher checks offsetting declining traffic… McDonald’s pulled back digital offers… Only 60% to 65% of the US systems followed the recommended pricing structure for its under-$3 menu. Management attributed roughly two-thirds of its traffic shortfall versus internal expectations to those value missteps.
McDonald’s is now emphasizing digital offers, meal bundles and simpler promotions. Cramer noted:
McDonald’s is also using AI to help them determine when and where to lower prices… They should have been all along, right? I mean, their AI operating system helps handle voice ordering, ultimately could free up at least 50 labor hours a week at each location. Automated inventory is expected to save about five hours weekly and reduce food waste by 15%. These changes flow through right to the franchisees’ bottom line. They should like it. McDonald’s can spread its technology across tens of thousands of restaurants.
Read Here: McDonald’s (MCD) vs. Starbucks (SBUX): Which Is the Better Stock to Buy?.
The Valuation Has Reset
McDonald’s Corporation trades at approximately 17x forward earnings, according to Yahoo Finance data, compared with approximately 21 times for Yum! Brands. Cramer is focused on the gap between McDonald’s current multiple and its historical valuation, as he said:
It’s trading at just 18 times next year’s earnings estimate. Historically, McDonald’s tended to trade in the mid-20s, meaning we’re now getting a substantial discount from its historical value. In fact, McDonald’s hasn’t been this cheap since 2014, when the business was falling apart. But then they brought in a new CEO who turned things around really quickly… McDonald’s has come through difficult stretches before. It’s in their DNA. I don’t doubt its ability to do it again.
Bear Case: Sales and Payback
A big risk is that McDonald’s Corporation spends heavily before sales improve enough to justify the investment. Cramer said a typical drive-through location could require approximately $800,000 of incremental investment, leaving little room for a prolonged period of weak traffic or disappointing efficiency gains. Additionally, the company needs to regain traffic without damaging franchisee economics, particularly as consumers remain price-sensitive and operating costs remain elevated. To find out about the company’s earnings result reported in August and Cramer’s comments around it, click here.
Hedge Fund Positioning and Short Interest
As per Insider Monkey, which tracks more than 1,000 hedge funds, there were 79 hedge funds holding McDonald’s Corporation in the second quarter, down from 83 in the first quarter. Short interest was approximately 1.72% to 1.73% of the float. Cramer concluded by saying:
Bottom line of this very complex story: McDonald’s remains a show-me stock. Investor Day did indeed disappoint. The macro is difficult, and a cheap valuation alone won’t bring customers back. But at this level, I am tempted to be a buyer, not a seller. This is a great business that’s fallen on hard times. They just need to demonstrate that they can get their house in order. At the end of the day, it’s still McDonald’s, not Wendy’s, thank heavens. Sure, the stock’s gotten hit, but if it’s bounced off at this price-to-earnings level before, I think now the odds favor that a bottom could be at hand.
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