McDonald’s stock bounced back in Thursday stock market action and continued higher early Friday. Despite slipping on Wednesday following the fast-food giant’s stronger-than-expected second-quarter earnings report, MCD stock’s momentum seems to have survived its earnings test.
That’s probably because the Golden Arches has a lot of business momentum right now, including a “genius” marketing campaign, a hot-selling new Crispy Chicken Sandwich and a new digital loyalty program in the U.S.
As several years of McDonald’s (MCD) big-spending initiatives begin to pay off, MCD stock could go on a run. So is now a good time to buy McDonald’s stock?
McDonald’s Stock News
On Thursday, McDonald’s unveiled its next “famous orders” marketing pitch featuring rapper Saweetie’s selection of a Big Mac, four-piece Chicken McNuggets, medium fries, a medium Sprite, and barbecue and sweet ‘n sour sauces. The Saweetie Meal hits restaurants Aug. 9.
On Wednesday, McDonald’s reported Q2 EPS of $2.37 vs. 66-cents in the Covid-hit year-ago period. Revenue jumped 57% to $5.89 billion.
Global same-store sales surged 40.5% from a year ago, while rising 6.9% from the second quarter of 2019. U.S. same-store sales rose 25.9% from a year ago and 14.9% from Q2 2019, fueled by the Crispy Chicken Sandwich and a promotion featuring the Korean pop band BTS.
International markets, which were hit harder by Covid partly because drive-thrus are less common, saw a dramatic rebound. Operated and franchised markets, including Australia, France, Germany, Spain and the U.K., saw Q2 comparable-restaurant sales rise 75%, after falling 41% in the year-ago quarter. Licensed markets, including Japan, China and Latin America, saw sales grow 32%, overcoming the year-ago 24% decline.
McDonald’s said that 12 million people had already joined its MyMcDonald’s digital loyalty program, which launched nationwide on July 8. Customers collecting rewards on their first purchase through the app will get a 1,500-point bonus to cash in on their next order. That’s worth an order of hash browns, vanilla cone, McChicken or cheeseburger. They’ll also collect 100 points per dollar spent.
McDonald’s Stock Analysis
McDonald’s has long been considered a defensive stock and often performs well when growth stocks falter. But MCD stock had largely sat out a strong run for the stock market over the past nine months — until last week.
After notching a record high 231.91 on Oct. 16, McDonald’s stock pulled back as much as 12.5%, hitting bottom on March 4. Then MCD stock proceeded to rise for nine straight weeks, first nosing above a 232.01 buy point on April 6.
That breakout and ensuing advance came on below-average volume, a sign MCD stock wasn’t quite ready for take-off. MCD stock only pushed as high as 238.18 on May 3.
After that, MCD stock etched out a flat 10-week base with a 238.28 buy point, according to MarketSmith. On July 22, MCD stock strode into buy territory, rising 1.2% to 238.67, then kept climbing. McDonald’s stock closed at a record high 246.35 on Tuesday.
On Wednesday, after reporting earnings before the open, MCD stock slipped 1.9% to 241.78. But McDonald’s stock bounced back 0.9% on Thursday, then tacked on 0.3% to 244.79 early Friday.
The buy zone for the Dow Jones stock runs through 250.19.
The technical backdrop for MCD stock remains on the soft side. MCD stock’s relative strength line, the blue line in IBD charts that tracks a stock’s performance vs. the S&P 500, recently tested a five-year low, though it has broken out of a downtrend.
However, MCD stock has had long periods of moving sideways followed by periods of outperforming the broad market. This could be one of those times, but the track record isn’t great.
McDonald’s Hits The Accelerator
McDonald’s launch of its loyalty program and its Feb. 24 Crispy Chicken Sandwich launch followed the Nov. 9 unveiling of its Accelerating the Arches strategic plan. In addition to strengthening its core menu lineup, McDonald’s announced its plan to step up the pace of investments in new stores and technology.
CFO Kevin Ozan said McDonald’s will spend about $2.3 billion per year in 2021 and 2022, up from $1.6 billion in 2020.
“This outlook is significantly above the (around) $1.2 billion run rate that was expected” in coming years, wrote BTIG analyst Peter Saleh.
Wall Street’s early response to the Golden Arches’ bigger-spending plans was lukewarm. Investors had expected instant gratification, via solid sales gains, moderating outlays and juicier profits. Yet analysts have largely endorsed McDonald’s strategy to capitalize on its market position that has only gotten stronger during the coronavirus pandemic.
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The Dow Jones giant’s more aggressive strategy followed big gains in U.S. comparable-restaurant sales, fueled by successful marketing initiatives such as the Travis Scott meal. The promotion featuring the rap star got 29 billion views across social media channels.
The “famous orders” promotion starting Korean pop band BTS, which ran from late May through June 20, help fuel Q2 sales.
In a June 2 online chat with CEO Chris Kempczinski, Bernstein analyst Sara Senatore called the promotion “a stroke of genius.”
Kempczinski said that “famous orders” has renewed McDonald’s culture relevance “that we had maybe let get stale.” The “famous orders’ promotion taps into the “insight that everybody has their favorite McDonald’s order.”
An added bonus is that the orders based on McDonald’s core menu don’t add any complexity in the kitchen.
“Early in the pandemic, the U.S. business removed dozens of menu items,” President Joe Erlinger said on the April 29 earnings call. “As a result of this focus, our drive-thrus got faster, margins grew and customer satisfaction improved. Put simply, our restaurants became easier to run and more profitable.”
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How Does McDonald’s Stock Stack Up Vs. Competition?
The Retail-Restaurants industry group is ranked No. 36 out of 197 industry groups based on price performance and momentum.
IBD Stock Checkup shows that McDonald’s stock is several steps behind the leaders in the Retail-Restaurants group. McDonald’s stock has a decent 72 IBD Composite Rating, with 99 the top rating. That places MCD stock No. 15 in its industry group. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
Is MCD Stock A Buy?
McDonald’s seems to be putting in place the right ingredients. Same-store sales in the U.S. are cooking, and promotional activity could sustain the strength. The international picture is finally improving, though Covid could make the road bumpy. Still, the fast-food giant has a history of relatively bland earnings and sales growth.
Bottom line: McDonald’s stock is a buy, technically. Still, based on recent history and its moderate growth prospects, investors shouldn’t expect this Dow Jones giant to deliver big returns. The weak relative strength reflects a long stretch of underperformance.
As long investors have a green light to buy growth stocks at proper entry points per IBD’s daily The Big Picture column, investors may find better buying opportunities in younger, faster-growing companies. To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of the economy and financial markets.
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