Despite showing resilience in the first half of the year, McDonald’s [MCD] share price has recently been chipped away. McDonald’s share price fell rapidly through the second half of last month, closing at $213.00 on 30 October. With third-quarter earnings report due to be announced on 9 November, will investors regain their appetite for McDonald’s share price?
It was a tasty start for the year for McDonald’s share price. Following a peak of $217.46 on 12 February, McDonald’s share price then flopped to an intraday low of $124.23 during March, as lockdown restrictions aimed at combating the coronavirus pandemic saw the global restaurant industry grind to a halt.
However, McDonald’s share price recovered well from this setback, and the slump was ultimately sandwiched between two periods of growth for the stock, which reached an all-time high of $231.91 on 16 October. Investors were loving it.
However, this momentum has since slowed. As of 6 November, although McDonald’s share price has registered 11.7% year-to-date gains, it was 6.6% lower than that mid-October peak at $216.56.
The coronavirus pandemic hit McDonald’s share price and wider business hard. Lockdown restrictions meant that sales slowed at the end of Q1 and slumped, in Q2, to $3.8bn, a 29.6% year-over-year decline.
Data on McDonald’s earnings reports from Zacks Equity Research stretching back as far as 2009 doesn’t contain a single quarter with lower sales. In fact, besides 2020’s Q1 result, McDonald’s sales haven’t dipped below $5bn during that period.
McDonald's Q2 sales - a 29.6% YoY decline
The results marked the worst global sales decline for 15 years, according to Fortune. The public were apparently so starved of their fast-food fix that the queues at McDonald’s drive-thrus made national news when restaurants re-opened in June.
Indeed, the drive-thru market appears to have contributed, along with low prices, to a restaurant industry-beating recovery by McDonald’s. On 8 October, the company announced a 5% increase in US same-store sales during Q3. McDonald’s also announced an increase to its shareholder dividend, in the company’s October mid-quarter update, to $1.29 per share.
Outside the US, however, the picture is less rosy. Harsher lockdown restrictions and a lower prevalence of drive-thru lanes has seen same-store sales continue to fall in the UK, Germany, Spain, China and Latin America.
What’s more, the increase in US sales has come at a cost. McDonald’s has had to invest heavily in advertising since the summer to drive demand The upcoming earnings announcement will reveal how this affected McDonald’s profitability.
Another potential drag on McDonald’s share price is the looming threat of two multi-billion-dollar discrimination lawsuits being brought by 52 black franchisees of McDonald’s, who accuse the firm of funnelling them into undesirable, unprofitable locations and failing to support them in the face of falling sales and rising debts.
The suits are seeking damages of $4m to $5m per store, leaving McDonald’s exposed to more than $3bn of risk. While the ongoing legal debate could account for some recent shareholder pessimism, however, it won’t have any significant impact on McDonald’s Q3 results.
McDonald's estimated Q3 sales
Zacks predicts that McDonald’s sales will return to something like pre-pandemic levels, with a consensus estimate of $5.37bn. While this would represent a year-over-year decline of 1.2%, it would still be a marked improvement on the first two quarters of 2020. A predicted EPS of $1.93 would also be an improvement on the $1.47 and $0.65 posted in Q1 and Q2 respectively, though a year-over-year fall of 8.5% suggests profitability will have been hit by stagnating sales and increased marketing costs.
What the analysts think
With signs of recovery from the pandemic’s worst ravages strong, analysts are upbeat about McDonald’s prospects.
The consensus among 30 analysts polled by CNN Money was to Buy the stock, with 21 offering this rating, two recommending Outperform and seven suggesting to Hold.
The median target among 26 analysts offering 12-month forecasts for McDonald’s share price was $244.50, a 12.9% increase on the stock’s 6 November closing price.
A high target of $274 implies 26.5% growth while a low target of $214, represents a 1.2% decrease from McDonald’s share price on 6 November.
|PE ratio (TTM)||34.69|
|Quarterly Revenue Growth (YoY)||-30.5%|
McDonald's share price vitals, Yahoo Finance, 9 November 2020