A Cheap Fast Food Stock Making Technological Advances
The latest Federal Reserve meeting minutes were worrisome to investors seeking some subtle hints that interest rates would rise no higher. Arguably, some indication of a pause in rate hikes could have put an end to the market's nasty start to August. In any case, I don't think you can blame the Fed for staying focused on slaying the dragon that is inflation - because that dragon may be down, but it's certainly not dead. Further surges in the 10-Year Treasury note ($TNX) could apply more selling pressure to this market. And like it or not, discussion of a possible recession may be back on the table.
In any case, now seems like a good time to lighten up on high-tech momentum stocks in favor of some fast-food plays. In particular, McDonald's (MCD) is an intriguing way to ride out this market pullback. Though it's an easy-to-understand company in a reasonably predictable industry, I don't think it's fair to dismiss the firm as boring or incapable of innovation. If anything, McDonald's is capable of delivering stealth innovation, or innovation that investors may take for granted, given the traditionally low-tech nature of the quick-serve restaurant industry.
Sure, popular quick-serve restaurant chains may not come to mind when one thinks of innovation these days, especially with the rise of generative artificial intelligence (AI). Still, these companies have a lot to gain by tapping into unorthodox initiatives to help drive sales, customer loyalty, and satisfaction.
Further, wandering outside of one's circle of competence with new concepts and technologies, like automation AI, could also help give margins a sustainable boost over time.
McDonald's: Fast Food's Most High-Tech Play?
McDonald's is the largest fast-food chain on the planet, with a towering $207.9 billion market cap. The company hasn't gotten to this point by staying within its comfort zone. Through the years, McDonald's has embraced cutting-edge technologies, including digital kiosks and mobile ordering. In fact, you can view McDonald's as something of an industry pioneer when it comes to technology.
Though the rest of the industry has since caught up in terms of mobile apps, delivery, and high-tech social marketing (think celeb-endorsed meals, or the return of McDonald's character Grimace), I believe few competitors are executing on tech nearly as well as McDonald's. Indeed, any fast-food firm can create its own mobile app. But it's hard to develop one that loyal customers keep coming back to. In that regard, McDonald's app still stands head and shoulders above many of its peers in the space.
McDonald's is already moving to where it thinks the puck is headed next. The company was one of the first to bring digital kiosks into restaurants, and seems poised to automate significant aspects of the drive-thru. Reportedly, there's a futuristic McDonald's location at Sydney's airport that already makes good use of automation robotics. Only time will tell when this tech will make its way to a McDonald's location near you, as it's still many years away from a global roll-out. Still, it's worth keeping tabs on as a McDonald's investor, given the positive effect this could have on operating margins.
McDonald's CosMc's Spin-Off Could Pay Off
Over the medium term, McDonald's is going for a new restaurant concept with “CosMc's.” Call it a spin-off, if you will. The restaurant takes a “small format" to another level, with less seating and more emphasis on pick-up. Indeed, less real estate to sell burgers and fries could translate into next-level returns on invested capital. However, whether it's the concept of the future remains the big question. I think it could be, especially if automation and ordering tech get to a point where you can pick up your drive-thru order without much of a wait.
At 30.6 times trailing price-to-earnings, MCD trades at a multiple that aligns with the industry averages. Personally, I think it's a value play worthy of a larger premium, given its tech prowess. Perhaps the stock should go for closer to 35 times earnings, given its recession resilience and tech savvy.
The Bottom Line on McDonald's Stock
McDonald's seems to be experimenting quite a bit behind the scenes. Whether we're talking about menu innovation, order automation, clever marketing, or new concepts, I think it's about time we stop viewing McDonald's as a boring fast-food firm, and more of an industry innovator that's pushing all rivals to keep up or be left behind. At this pace of innovation, CEO Chris Kempczinski seems more like a tech visionary than a top boss of the golden arches.
On the date of publication, Joey Frenette had a position in: MCD . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.