Shares of McDonald’s (NYSE:MCD) eclipsed the $200 mark for the first time ever in late April after the global fast casual food giant reported first quarter numbers that sailed past expectations. Specifically, revenues, profits, global comparable sales, and domestic comparable sales all came in ahead of expectations, and McDonald’s stock rose a few percentage points in response to fresh all time highs.
This is nothing new for McDonald’s. The first quarter of 2019 marked the company’s fifteenth consecutive quarter of positive global comparable sales growth. During that 15 quarter stretch, McDonald’s stock has risen nearly 80%, versus a 43% gain for the S&P 500.
This out-performance from MCD stock will continue. Why? Because, at the end of the day, what drives McDonald’s is comparable sales growth. When comps are healthy and positive, MCD moves higher. When they are unhealthy and negative, MCD moves lower. Fortunately for shareholders, McDonald’s management is doing everything right to keep comparable sales growth in healthy and positive territory for the foreseeable future.
Thus, barring an unforeseen sharp economic downturn, MCD stock should remain on a winning trajectory. While that winning trajectory will naturally feature some bumps in the road, the big picture idea here is that McDonald’s stock will continue to grind higher.
Price & Convenience Always Win
In the big picture, McDonald’s management team is making all the right moves to ensure that McDonald’s remains the dominant player in the global fast casual good industry.
When it comes to that industry, only two things truly matter: price and convenience. When consumers go to a fast casual restaurant, their priorities are minimizing cost and maximizing convenience. Sure, consumers may also want the meal to be healthy, but if healthy were the priority, the consumer would cook at home. Consumers may also want the meal to be very tasty, but if quality were the priority, the consumer would eat at a fancy restaurant.
In other words, the keys to a fast casual chain succeeding rest in minimizing price and maximizing convenience.
McDonald’s Is Making All the Right Moves
McDonald’s is doing just that. On multiple fronts.
First, there’s seemingly a McDonald’s on every street corner and at every freeway exit, so convenience is already second-to-none. Second, McDonald’s has long been known for its cheaper-than-peer prices, so the prices are likewise second-to-none. But, instead of resting on its laurels, McDonald’s is rapidly innovating to further widen its inherent convenience and price advantages.
The company is modernizing stores across the U.S. to have more advanced and efficient ordering systems, like digital kiosks, so as to minimize the amount of time consumers spend ordering food.
Also on the maximizing convenience front, McDonald’s has aggressively expanded its digital ordering and delivery presence, enabled consumers to more easily order custom meals, and built out a robust mobile ordering system. Meanwhile, on the minimizing price front, McDonald’s continues to consistently roll out promotions (like the 2 for $5 Mix and Match deal) and keep prices across the menu exceptionally low.
Broadly speaking, McDonald’s is doing everything it possibly can to maximize convenience and minimize price.
McDonald’s Stock Will Stay on a Winning Path
Because McDonald’s management continues to aggressively innovate in all the right areas, comparable sales growth at McDonald’s should remain healthy and positive for the foreseeable future.
That’s a big deal. MCD trades with its comps numbers. When those numbers are positive, the stock rises. When they are negative, the stock drops. Thus, so long as comps remain in positive territory, McDonald’s stock should be able to trend higher.
This is especially true considering where MCD stock trades today. To be sure, the stock isn’t cheap. But, at 24.5-times forward earnings, the stock trades at the same valuation as the broader restaurant sector. Also, with a 2.2% yield, the stock has a bigger yield than the S&P 500.
Thus, this is a stock with a relatively average valuation and an above-average yield. That combination plus positive comps should drive out-performance in the stock going forward.
Bottom Line on McDonald’s Stock
When it comes to fast casual restaurant stocks, McDonald’s is second to none. Not only is this company the global leader in the space, but McDonald’s is also widening its lead through aggressive innovation and investment where it matters.
So long as this remains true, McDonald’s stock will continue to grind higher.
As of this writing, Luke Lango was long MCD.
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