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3 Reasons Why McDonald's Stock Is Still a Buy

Motley Fool - Thu Aug 3, 8:30AM CDT

McDonald's(NYSE: MCD) just gave investors a few more reasons to love its stock. The fast-food giant in late July announced fiscal second-quarter results that showed solid growth momentum in an increasingly competitive selling environment.

Investors might have some reservations about the stock, considering it is sitting near all-time highs today. But McDonald's business is firing on all cylinders right now, which should support excellent shareholder returns from here. Let's look at a few big reasons why the stock is still a buy.

1. Growth momentum

McDonald's thrilled Wall Street three months ago when it announced that comparable-store sales were up a blazing 13% in the fiscal first quarter. This past quarter was nearly as impressive.

McDonald's achieved 12% higher comps across its global portfolio and a 10% increase in the core U.S. market. Those gains were powered by a healthy mix between rising customer traffic and increased spending, meaning the chain didn't have to rely solely on price hikes to keep sales rising.

Core menu items performed well, and so did its limited-time launches. Customers were especially happy with quick fulfillment times in the drive-thru and delivery channels. "The McDonald's brand has never been stronger," CEO Chris Kempczinski said in a press release.

2. Excellent profits

McDonald's has improved on its already industry-smashing profit margin in 2023. The company converted a full 46% of revenue into operating profit through the first half of the year, in fact, up from 35% a year earlier. This metric is being pushed higher by several positive factors, including cost cuts, faster sales growth, rising prices, and higher demand for delivery and drive-thru.

MCD Operating Margin (TTM) Chart.

MCD Operating Margin (TTM) data by YCharts.

McDonald's profitability is also unusually high due to its franchise selling model that delivers a steady stream of royalty fees, rental fees, and franchise charges. This setup helps accelerate earnings growth in expansionary times like these. Yet it still requires the company to succeed with fast-food fans by steadily winning market share.

3. The price

As you might expect, investors are being asked to pay a premium for all of this success. McDonald's stock is valued at 9 times annual sales today, near its all-time high valuation. You could buy Chipotle, which is growing nearly as fast, for about 6 times revenue. Domino's, which is struggling to regain its momentum, is valued at 3.1 times sales.

Yet growth investors seeking quality earnings will likely be happy to pay the premium for Mickey D's. The burger specialist has a clear path toward continued market share wins, and earnings growth might even accelerate further as the profit margin holds about 40% of sales.

If you're risk-averse, you might want to simply watch the fast-food stock for a while in hopes of catching a cheaper price during a temporary market downturn.

But patient shareholders aren't likely to be disappointed even after establishing a position following the recent rally. McDonald's is doing a lot of things right and setting itself apart from the fast-food competition. Those successes are understandably reflected in its elevated stock price.

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Demitri Kalogeropoulos has positions in Chipotle Mexican Grill and McDonald's. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Domino's Pizza. The Motley Fool has a disclosure policy.

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