McDonald’s stock advanced to a record high in Thursday stock market action, joining a restaurant stock rally fueled by Chipotle Mexican Grill’s blowout earnings report. While MCD stock has been a laggard for the last couple of years, the Dow Jones stock has a lot going for it, including a “genius” marketing campaign, a hot-selling new Crispy Chicken Sandwich, and drive-thrus that are “cranking.” Now it’s rolling out a new loyalty program across the U.S.
As several years of McDonald’s (MCD) big-spending initiatives begin to pay off, MCD stock could go on a run. The fast-food giant reports Q2 earnings before the open on July 28. So is now a good time to buy McDonald’s stock?
McDonald’s Stock News
The fast-food giant launched its MyMcDonald’s digital loyalty program nationwide on July 8. Customers collecting rewards on their first purchase through the app will get a 1,500-point bonus to cash in on their next order. That’s worth an order of hash browns, vanilla cone, McChicken or cheeseburger. They’ll also collect 100 points per dollar spent.
On Wednesday, UBS analyst Dennis Geiger wrote in a research note that his checks with franchisees showed McDonald’s same-store sales strength continued through Q2 and into the start of Q3. He kept a buy rating and 260 price target for MCD stock.
McDonald’s Stock Analysis
McDonald’s has long been considered a defensive stock and often performs well when growth stocks falter. But MCD stock has largely sat out a strong run for the stock market over the past nine months.
After notching a record high 231.91 on Oct. 16, McDonald’s stock pulled back as much as 12.5%, hitting bottom on March 4. Then MCD stock proceeded to rise for nine straight weeks, first nosing above a 232.01 buy point on April 6.
That breakout and ensuing advance came on below-average volume, a sign MCD stock wasn’t quite ready for take-off.
MCD stock only pushed as high as 238.18 on May 3. After that, it etched out a flat 10-week base with a 238.28 buy point, according to MarketSmith. On Thursday, MCD stock strode into buy territory, rising 1.4% to 239.16 in afternoon action.
The technical backdrop for MCD stock remains on the soft side. MCD stock’s relative strength line, the blue line in IBD charts that tracks a stock’s performance vs. the S&P 500, isn’t far off a five-year low.
However, MCD stock has had long periods of moving sideways followed by periods of outperforming the broad market. This could be one of those times, but the track record isn’t great.
McDonald’s Hits The Accelerator
McDonald’s launch of its loyalty program and its Feb. 24 Crispy Chicken Sandwich launch followed the Nov. 9 unveiling of its Accelerating the Arches strategic plan. In addition to strengthening its core menu lineup, McDonald’s announced its plan to step up the pace of investments in new stores and technology.
CFO Kevin Ozan said McDonald’s will spend about $2.3 billion per year in 2021 and 2022, up from $1.6 billion in 2020.
“This outlook is significantly above the (around) $1.2 billion run rate that was expected” in coming years, wrote BTIG analyst Peter Saleh.
Wall Street’s early response to the Golden Arches’ bigger-spending plans was lukewarm. Investors had expected instant gratification, via solid sales gains, moderating outlays and juicier profits. Yet analysts have largely endorsed McDonald’s strategy to capitalize on its market position that has only gotten stronger during the coronavirus pandemic.
The Dow Jones giant’s more aggressive strategy followed big gains in U.S. comparable-restaurant sales, fueled by successful marketing initiatives such as the Travis Scott meal. The promotion featuring the rap star got 29 billion views across social media channels.
The latest “famous orders” promotion featuring the Korean pop band BTS ran from late May through June 20.
In a June 2 online chat with CEO Chris Kempczinski, Bernstein analyst Sara Senatore called the promotion “a stroke of genius.”
Kempczinski said that “famous orders” has renewed McDonald’s culture relevance “that we had maybe let get stale.” The BTS promotion taps into the “insight that everybody has their favorite McDonald’s order.”
An added bonus is that the orders based on McDonald’s core menu don’t add any complexity in the kitchen.
“Early in the pandemic, the U.S. business removed dozens of menu items,” President Joe Erlinger said on the April 29 earnings call. “As a result of this focus, our drive-thrus got faster, margins grew and customer satisfaction improved. Put simply, our restaurants became easier to run and more profitable.”
Drive-thrus in the U.S. “are cranking,” Kempczinski said in his June 2 update. “We discoverd capacity that frankly we didn’t realize we had.”
McDonald’s also sees further upside from its rewards program. An early test of the program showed that “our loyalty customers are far more likely to return in the next 30 days compared to non-loyalty customers,” Erlinger said April 29.
On April 29, McDonald’s reported Q1 EPS of $1.92, up 31% from a Covid-hit year-ago period. Revenue rose 9% to $5.12 billion.
Global same-store sales rose 7.5%, led by 13.6% growth in the U.S. Meanwhile, international markets, where drive-thrus are less common, saw less of a recovery. Operated and franchised markets, including Australia, France, Germany, Spain and the U.K., saw Q1 comparable-restaurant sales rise 0.6%, after falling 6.9% in the year-ago quarter. Licensed markets, including Japan, China and Latin America, saw sales grow 7.5%, overcoming the year-ago 3.4% decline.
McDonald’s is scheduled to report Q2 earnings before the stock market opens on July 28.
How Does McDonald’s Stock Stack Up Vs. Competition?
The Retail-Restaurants industry group is ranked No. 15 out of 197 industry groups based on price performance and momentum.
IBD Stock Checkup shows that McDonald’s stock is several steps behind the leaders in the Retail-Restaurants group. McDonald’s stock has a mediocre 58 IBD Composite Rating, with 99 the top rating. That places MCD stock No. 23 in its industry group. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
Is McDonald’s Stock A Buy?
McDonald’s seems to be putting in place the right ingredients. Same-store sales in the U.S. are cooking, and promotional activity could sustain the strength. The international picture is ripe for improvement, but Covid could make the road bumpy.
Still, the fast-food giant has a history of relatively bland earnings and sales growth. That’s hard to overlook when MCD stock’s relative strength line has sagged even as McDonald’s stock broke out to record highs.
Bottom line: McDonald’s stock is a buy, technically. Still, based on recent history and its moderate growth prospects, investors shouldn’t expect this Dow Jones giant to deliver big returns. The weak relative strength reflects a long stretch of underperformance.
Buying ahead of earnings also carries higher risk. IBD has developed an options strategy to manage earnings risk.
As long investors have a green light to buy growth stocks at proper entry points per IBD’s daily The Big Picture column, investors may find better buying opportunities in younger, faster-growing companies. To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of the economy and financial markets.
YOU MAY ALSO LIKE: