McDonald's (MCD -0.91%) shareholders have had a rough year so far in 2023. The fast-food stock has underperformed the market by a wide margin, declining 5% through mid-October, while the S&P 500 gained 14%.
That stock price slump reflects worries about slowing spending in the fast-food industry, but those fears could be overblown. The industry leader maintained its positive sales momentum into the early summer months, after all. Its profitability still sets the standard in its industry niche, too.
With those positive factors in mind, let's look at where McDonald's could be headed in the next year or so.
The short-term expectations
Shareholders are hoping to hear good news from the management team in the upcoming earnings report on Oct. 30. McDonald's last update was worth celebrating, with comparable-store sales gains landing at 12% in Q2 to mark just a modest slowdown compared to 13% in the prior quarter. Chipotle, by comparison, grew Q2 comps at a 7% rate.
Growth was well balanced between the U.S. market and Mickey D's international segments. And it was powered by a healthy mix between rising traffic and increased spending. "The McDonald's brand has never been stronger," CEO Chris Kempczinski told investors in late July.
These successes have most Wall Street pros forecasting a strong Q3 ahead, with McDonald's likely to report significantly higher sales and earnings in late October.
The main worries
It is the next few quarters that have investors worried. McDonald's noted in July that several macroeconomic challenges were pressuring the business, including rising costs and slower customer traffic in the fast-food industry. "In line with industry trends and as inflation begins to normalize later in the year, we expect top-line growth to moderate," executives said in a recent conference call. That cautious outlook helps explain why most investors currently expect slower revenue gains in late 2023 and throughout fiscal 2024.
Shareholders should watch the upcoming earnings report for signs of these stresses beginning to impact the fast-food giant. These might show up in weaker customer traffic at McDonald's restaurants, and potentially slower demand for higher-priced menu items and home delivery.
The stock's path
McDonald's shareholders still have a good chance at beating the market over the next year. The restaurant specialist is still winning market share, even if the overall market is slowing. It is in an excellent financial position as well, with industry-leading profit margins of above 40% of sales.
And fast-food fans have responded with enthusiasm to its latest efforts to improve service levels. Customer satisfaction has been rising in most of its major markets in the past year.
Shares are priced at a reasonable valuation, too. You can buy McDonald's for less than 8 times annual revenue today, down from a P/S ratio of about 10 earlier in the year. That decline makes it less likely that you'll overpay for this successful business, even though short-term returns might be rocky.
Don't forget McDonald's dividend, which currently yields 2.7%. The chain has increased that payout for 46 consecutive years, with the last boost being a tasty 10% raise. Odds are good that management will announce another solid increase for 2024, giving shareholders an immediate boost to their returns next year.
