Investors are loving McDonald's (MCD 0.51%) stock these days. The fast-food giant's gains have comfortably outpaced the wider market in the past full year and it's close to an all-time high despite the slump in the S&P 500 since early 2022.
McDonald's is also trading at some of the highest valuations that shareholders have seen in recent years, which is usually a bad sign when it comes to future returns. Yet the stock could still be a long-term winner from here. Let's take a look at a few reasons why it's not too late to add McDonald's to your portfolio.
Supersized growth
McDonald's is leading the expanding fast-food industry in core growth metrics. Shoppers are increasingly buying food away from home, but some are seeking more value while others are looking to splurge.
Mickey D's is satisfying both of those cravings. Comparable-store sales growth accelerated to a blazing 13% through late March, easily beating Chipotle's still-strong 11% increase.
McDonald's is winning market share through a healthy balance between rising customer traffic and increased average spending. These wins imply that the chain will be able to cater to a wide range of consumer preferences going forward, whether or not a recession develops over the next few quarters.
Tasty finances
Investors were worried a few years ago that McDonald's best profitability days were behind it. The company got a huge boost from its refranchising strategy that shifted its store base to franchisees and reduced the proportion of corporate-run restaurants to almost zero.
MCD Operating Margin (TTM) data by YCharts
Yet the last few quarterly reports suggest that McDonald's can still improve on its industry-leading profit margin in other ways. Targeted price increases helped this past quarter, but so did popular menu introductions. McDonald's is also getting a lift from demand tilts toward drive-thru and delivery. Overall, operating profit margin has crossed 45% of sales to set a new record for the business.
Price and value
Shares are now trading at more than 9 times annual revenue, which is rich for a fast-food business. You can buy Chipotle for closer to 6 times sales or own shares of Restaurant Brands International, the parent of Burger King, for 5 times sales. Shake Shack is trading for less than 3 times sales, too.
But McDonald's delivers far higher profitability, a more diversified sales footprint, and faster growth than its peers. The stock price premium makes sense given how the chain can keep boosting annual earnings even as consumers become more cautious in their spending.
And, if McDonald's can keep setting profitability records as it wins market share, then returns will likely still be strong from this elevated level.
Investors worried about overpaying for this high-performing business might want to simply watch McDonald's stock in case a wider market downturn pulls valuations lower.
But there are also good reasons to start accumulating shares near all-time high prices. McDonald's is primed for excellent earnings over the long term, and these wins should help shareholders reap market-beating returns in the next decade or so.
