Mcdonald’s (NYSE:MCD) brings predictability in a volatile world and the past few weeks has demonstrated McDonald’s stock has the same stability.
Source: Mike Mozart via Flickr
Investors have been feeling the whiplash of the last couple of weeks. Major indices swinging a full percentage points intraday or a couple of points in one direction, then reversing the next have become the new normal. Volatility reared its head but seems to have died down just as quickly as it rose.
Over the last two weeks, the S&P 500 has lost 0.8 percent. Meanwhile companies like McDonald’s and Darden Restaurants, Inc. (NYSE:DRI) looked really strong amidst the volatility. Both stocks posted g
ains with McDonald’s stock up almost a percent over the time period and DRI making a big 4.5 percent up.
Even Chipotle Mexican Grill, Inc. (NYSE:CMG) has been making new highs, indicative of the demand for names in the restaurant sectors though still looking expensive from a valuation standpoint.
A Closer Look at McDonald’s Stock
It may be surprising for some investors to hear that Mcdonald’s bought a machine learning startup called Dynamic Yield for $300 million in March. Yes, it is at its core a fast casual chain, but that’s just the past and the present. In the future Mcdonald’s will still be selling Happy Meals but how they sell in undergoing a shift.
The future is about understanding customers and how to improve sales based on its dynamic menu. Taking into account factors like weather, the technology will redesign the display on the menu. On a hot day, for example, McFlurry’s are likely to be front and center.
MCD will be rolling this AI technology out across 1,000 locations in the next couple months and will eventually reach all 14,000 US restaurants as well as their international stores.
It’s hard to assess just how much this will add to the Company’s top line as it isn’t exactly an event-based catalyst. What it does ensure is consistent revenue growth over the next few quarters as the technology extends throughout their entire ecosystem of restaurants.
While it’s true that MCD stock doesn’t look particularly cheap at 26x earnings, with the addition of AI technology, they have here another lever for growth. So maybe 26x isn’t all that rich a multiple after all.
An Upscale Alternative
DRI had a big third quarter, showing that momentum is on their side. Total sales increased 5.5 percent and same-restaurant sales increased as well to the tune of 2.8 percent. Standout performers for comp sales included Olive Garden (up 4.3 percent), LongHorn Steakhouse (up 3.8 percent) and The Capital Grille (up 4.3 percent).
After a tepid second quarter with just 2.1 percent growth in same-restaurant sales, DRI has bounced back. Expectations for the fourth quarter are in line with the most recent quarter.
Darden exceeded top line expectations due to market share gains. This reaffirms that management’s strategy is working. Across the portfolio of 1,700 restaurants, Darden continues to invest in brands that create exceptional dining experiences. Management has also continued to support its shareholders with a continuation of its share repurchase program.
Given the strong quarterly figures, Darden increased its financial outlook for fiscal 2019 and for the fourth quarter. Sales growth notched up to match the third quarter number of 5.5 percent as did expectations for comparable sales growth. All in all, it paints a rosy picture for DRI stock in the second half of the year.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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