McDonald's (MCD 0.38%) stock beat the market in 2022 as the fast-food giant achieved solid sales and earnings growth. But shares are still trading about 15% below the highs set at the start of that year.
Is that discount enough to make McDonald's an attractive investment, given that other restaurant chains have seen bigger discounts during the recent market downturn? Let's look at the stock's prospects in light of the company's just-released earnings update that features some positive comments about fiscal 2023.
Excellent trends
The chain's late-January update showed that investors were right to keep the stock's returns above those of the market in 2022. Comparable-store sales (comps) were up a blazing 12% in the fourth quarter, including a 10.3% increase in the core U.S. market.
Those gains marked an acceleration over the previous quarter's growth rate, indicating that McDonald's is thriving in today's selling environment. For the wider 2022 year, it achieved 10% comps growth thanks to a balance between rising spending and higher customer traffic. "Our ... strategy is driving growth and building brand strength," CEO Chris Kempczinski said in a press release.
Strong profits
There isn't much to complain about on the profit front, either. Yes, McDonald's is facing pressures from rising costs and currency exchange swings, just like its peers. Operating income fell 10% in the full 2022 year.
That figure improves to a 3% increase when you factor in those temporary exchange-rate moves. And Mickey D's achieved a 14% increase in the most recent quarter, indicating that some of the worst profit pressures might have already passed.
Meanwhile, two other financial metrics demonstrate why this stock is so attractive to hold through almost any market environment. McDonald's heavily franchised operating model allowed it to convert more than 40% of revenue into profits. Compare that to Chipotle and its operating margin of about 12%.
MCD operating margin (TTM) data by YCharts. TTM = trailing 12 months.
The valuation
Investors have to pay a premium to own such a high-performing business. McDonald's is valued at 8.4 times annual sales right now, which is close to the peak valuation that shareholders saw during the stock market rally in 2021. You can own Chipotle or Tim Hortons owner Restaurant Brands International for just 5 times sales.
In my view, McDonald's is worth that premium. The company has proved that it can grow through boom times, but also when consumers are more focused on value. And its market leadership gives it flexibility that rivals just don't have. It can keep prices lower, for example, with help from its massive global-scale efficiencies.
Meanwhile, shareholders can expect a steady flow of cash returns through the combination of stock buybacks and a rising dividend. This cash will likely cushion overall returns in 2023, which could feature slower growth if a recession develops in the U.S. or other large markets.
Overall, McDonald's stock offers a compelling balance between growth and income. And its latest earnings report adds support to the bullish investing thesis.
