Investors are looking at a potentially tasty deal with McDonald's (MCD -0.91%) right now. The fast-food leader's stock has underperformed the market through the rally over the past year, even trailing rivals like Chipotle (NYSE: CMG) in the process. Shares have risen just 4% in that time compared to a 32% spike in the S&P 500.
The chain's stock is trading below the all-time highs it set in early 2024 of roughly $300 per share. But is it worth buying right now? Let's dive right in.
Slowing growth
Sluggish growth is the main reason the stock has underperformed lately. Sure, Mickey D's comparable-store sales (comps) were up 9% in the full 2023 fiscal year, which was better than most investors had hoped for at the start of the year. But the most recent results haven't been great.
Comps were up just 4% in the core U.S. market in the fourth quarter compared to Chipotle's 8% boost. McDonald's is seeing weaker demand in some areas as consumers look to save cash. Customer traffic fell this past quarter, helping convince Wall Street that there's a wider slowdown ahead.
The chain's comments echoed those of other consumer-facing companies like PepsiCo that suggest the past few years were unusually strong when it comes to sales. It might be time now for the pendulum to swing back the other way.
"We talk about comps getting back to more of that historical range of 3% to 4%," chief financial officer Ian Borden said in a conference call with investors.
It's still earning profits
McDonald's might be facing slowing sales growth, but that doesn't mean investors are bound to see subpar returns from holding the restaurant stock. You'll get exposure to industry-leading profit margins, for one.
Unlike Chipotle, McDonald's gets significant earnings from things like franchise fees, royalties, and rent payments. That approach is one key reason the chain has a nearly 50% operating profit margin compared to Chipotle's near-17%.
MCD operating margin (TTM) data by YCharts; TTM = trailing 12 months.
Yet that margin isn't stuck in one place, as you might expect to see from a mature business -- one that has been selling its core Big Mac sandwich for over 50 years.
Despite that established position, McDonald's has been able to increase its core profitability over the past decade through the combination of cost cuts and steadily improving market share. Operating profit recently crossed a blazing 46% of sales, a record for this highly efficient business.
Management hopes to push that level closer to 50% of sales over time, even through a potentially volatile period ahead. "We remain confident in the resilience of our business amid macro challenges that will persist in 2024," CEO Chris Kempczinski said in an early February press release.
Priced to move
Those challenges, which will mainly show up in slower sales trends, have made McDonald's stock a bit cheaper. Shares are valued at 8 times annual revenue, down from a price-to-sales ratio of 9 in mid-2023. Chipotle is priced at about the same premium, indicating investors are willing to pay more for growth right now than for earnings.
If you're a fan of brand strength, steady growth, and dividend income, then McDonald's could fit well in your portfolio after shares declined in recent months. Its sales slowdown shouldn't get in the way of market share gains, and annual earnings are likely to climb in the years to come as profitability expands.
So consider putting this stock near the top of your watch list, as a stellar performer that's fallen out of Wall Street's favor in the past year.
