McDonald's Corporation MCD stock is trading below the Zacks Restaurant industry. With a forward 12-month Price/Earnings ratio of 24.58x, it lies below the industry's average of 25.28x. Despite this, MCD is priced higher than the broader Retail-Wholesale sector, valued at 23.94x and the S&P 500, which averages 21.98x.
Year to date, McDonald's shares have posted a modest 2.4% gain, trailing behind the restaurant industry's 4.6% growth and significantly underperforming the broader S&P 500's impressive 20.5% surge. The company's stock performance also lagged major industry players. Chipotle Mexican Grill CMG has soared 25.4%, Yum! Brands YUM has gained 7.1% and CAVA Group CAVA has skyrocketed 187%.
Stock Price Performance
Image Source: Zacks Investment Research
What’s Hurting MCD?
McDonald's is grappling with softer comparable store sales growth, a significant headwind in 2024. In the second quarter, global comps slipped 1%, a stark contrast to the robust 11.7% increase in the prior-year period. The company’s comps decreased for the first time after increasing in thirteen straight quarters.
The decline was broad-based, with McDonald’s international operated markets showing weakness, driven by more cautious consumer spending and economic challenges. France, in particular, contributed to this soft performance. While McDonald’s registered positive comp sales in regions like Latin America and Japan, these gains were overshadowed by headwinds from the ongoing war in the Middle East and waning consumer confidence in China.
In the United States, comparable store sales dropped 0.7%, following a strong 10.3% growth last year. The decline in guest counts played a pivotal role, though the impact was partially offset by higher average checks fueled by strategic price increases. The international developmental licensed (IDL) segment saw a 1.3% drop in comps, underscoring the broader global challenges that the company is facing.
While McDonald’s traditionally leads on value, its value leadership gap has recently narrowed. Competitors offering aggressive pricing have gained market share in some regions.
High costs are likely to hurt the company’s margins. During the second quarter, McDonald’s total operating costs and expenses were $3.57 billion, up 5% year over year. The company expects operating margin to remain pressurized in the near term. Although inflation for items like food and paper has decreased in second-quarter 2024 to low single-digit levels, labor inflation remains higher, particularly in the United States. The company expects labor inflation to be in the high single digits in 2024.
MCD Earnings Estimate Revisions
McDonald's has seen a downward trend in its earnings estimates over the past 90 days. Earnings per share estimates for 2024 and 2025 have moved down 3.8% and 4.6%, respectively, to $11.68 and $12.58. This revision reflects tempered expectations for the company's near-term financial performance amid ongoing challenges.
End Notes
MCD is currently facing multiple challenges that have weighed on its stock performance and earnings outlook. Despite trading below the industry average P/E ratio, McDonald's shares have underperformed both the broader restaurant industry and the S&P 500 year to date in 2024. The company experienced its first decline in global comparable store sales after 13 consecutive quarters of growth. Inflationary pressures have also disrupted McDonald’s long-standing value programs, leading to reduced consumer demand and lost market share to competitors offering aggressive pricing.
As a result, earnings estimates for 2024 and 2025 have been revised downward, reflecting the challenges that the company faces in maintaining growth amid a tough economic environment. McDonald's currently holds a Zacks Rank #4 (Sell), which indicates that the stock is in a less favorable position. Investors may want to steer clear of MCD for the time being, as it appears to be in a challenging phase.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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