McDonald’s Corp. is experiencing a stock rally that is propelling it towards a potential record close, marking its first in seven months. This positive momentum comes despite concerns on Wall Street regarding declining sales and traffic, set against an uncertain macroeconomic backdrop.
Wells Fargo analyst Zachary Fadem addressed the prevailing apprehensions in the market, highlighting growing fears among investors that McDonald’s may fall short of fourth-quarter same-store sales expectations. Factors contributing to this anxiety include escalating tensions in the Middle East and an increasingly promotional environment within the quick-service restaurant industry.
Fadem acknowledged the heightened caution among investors, particularly concerning the potential deceleration of year-over-year growth in same-store sales, given the robust performance witnessed in the previous year. Additionally, concerns were raised about the anticipated negative prospects for traffic growth in 2024.
In contrast to these concerns, Fadem's research indicates that trends for McDonald's improved throughout the fourth quarter. Despite the mixed sentiment among investors, he emphasized that the stock is reasonably valued based on historical price-to-earnings ratios. Fadem expressed optimism about the stock's setup, considering these factors.
McDonald’s stock, trading under the symbol MCD, showed a 2.2% increase in afternoon trading, edging closer to achieving its first-ever close above $300. The current record close stands at $298.41, attained on June 30, 2023.
The company is slated to report its fourth-quarter results in early February. The FactSet consensus for same-store sales growth is 5%, down from 8.8% in the third quarter and 11.7% in the second quarter. This represents less than half the 12.6% growth observed a year ago. Despite the anticipated deceleration, McDonald’s has consistently surpassed same-store sales expectations in the past 11 quarters and 17 of the last 20 quarters.
Fadem also expressed positivity about McDonald's restaurant growth, projecting an increase of 4% to 5%, a notable development "for the first time in recent memory." He believes that Wall Street may be overlooking the long-term positive impact on McDonald's results stemming from this growth. This optimism is rooted in the significant investments made by the company over the past decade to enhance the productivity of new stores. Fadem sees the return on investment for new units as more favorable now than it has been in over a decade.
While McDonald’s stock is reaching towards a potential record, other players in the industry, such as Restaurant Brands International Inc. and Jack in the Box Inc., exhibit varied performances. Shares of Restaurant Brands International inched up 0.1%, while Jack in the Box rose 1.8% but remained 36.3% below its record close of $122.64 in May 2021.
In the broader market context, the Dow Jones Industrial Average, of which McDonald's stock is a component, surged 407 points, or 1.1%, towards a potential record close, further underlining the positive momentum across various sectors.
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