About the most unsurprising earnings beat around, fast-food icon McDonald’s (NYSE:MCD) basically confirmed the reality of the shifting economic landscape. Consumers are becoming more frugal about their spending while still keeping a few bucks in their pockets for discretionary pleasures. That suits McDonald’s well, as it aims to benefit from the “trade-down effect”. I am bullish on MCD stock.
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Q3 Print is a Major Validation of MCD Stock
On the day before Halloween, McDonald’s disclosed its results for the third quarter of Fiscal Year 2023. Far from a horror show, however, the fast-food giant delivered an impressive print. While the stirring data bolstered sentiment in MCD stock, it, more importantly, offered fundamental validation for the underlying business.
Specifically, TipRanks reporter Shrilekha Pethe noted that earnings per share landed at $3.19, representing a robust lift of 19% on a year-over-year basis. As well, the figure beat analysts’ consensus target of $3 per share.
On the top line, McDonald’s generated sales of $6.7 billion, an increase of 14% against the year-ago quarter. This exceeded analysts’ expectations, which called for $6.6 billion. And on a global level, the company’s comparable sales increased by 8.8% in Q3.
If that wasn’t enough, the holidays came early for stakeholders of MCD stock. Management hiked its quarterly cash dividend by 10% to $1.67 per share, per Pethe’s report. “With global Systemwide sales growth of 11%, our third quarter results reflect our position of strength as the industry leader,” remarked McDonald’s President and CEO Chris Kempczinski.
Fundamentally, McDonald’s validated the relevance of its core business — providing nutritional sustenance conveniently and cheaply — during times of uncertainty. Sure enough, the narrative appears very promising.
In Q2 of this year, McDonald’s also posted impressive sales. Back then, total revenue increased by 13.6% to $6.5 billion. In other words, even with the pressure of high inflation and high borrowing costs crimping consumer sentiment, people are still opening their wallets for McDonald’s. For stakeholders of MCD stock, it doesn’t get much better than this — except that outside factors indicate possibly more upside ahead for one of the symbols of American capitalism.
McDonald’s Potentially Poised to Rise on Compelling Catalysts
While it’s anyone’s guess how long McDonald’s can continue delivering outstanding earnings performances, the company should be able to ride the trade-down effect — meaning that as consumers feel the sting of various financial pressures, they’ll shift to cheaper products and services. Frankly, it doesn’t get much cheaper than Mickey D’s. In addition, investors should stick with MCD stock for two compelling catalysts.
First, more companies are starting to get aggressive with their return-to-office (RTO) mandates. As TipRanks contributor Steve Anderson mentioned, Amazon (NASDAQ:AMZN) represents one of the leaders in this pushback for normalcy. However, other major publicly-traded corporations have also cracked the whip, including a demand for four days in the office instead of the usual three.
At some point, this number will likely go to five. Why? As multiple sources such as Harvard Business Review indicate, corporate managers have difficulty trusting remote employees.
Therefore, as companies recall more worker bees, fast-food breakfast sales should increase as people buy breakfast before work. Indeed, CNBC reported that while overall restaurant traffic has been declining, restaurant breakfast sales have been holding steady for that exact reason. With McDonald’s offering cheap breakfast, MCD stock could march higher.
Second, while many consumers are still prioritizing “funflation”-related expenditures – that is, one-off events such as attending Taylor Swift concerts – at some point, the euphoria will decline. When it does, consumers will be incentivized to consider monitoring their budget more vigorously.
Under this circumstance, MCD stock may become a clear winner. The underlying company offers the many conveniences of fast food while being relatively budget-friendly. Thus, McDonald’s is much more than just a play on its Q3 report.
Is McDonald’s Stock a Buy, According to Analysts?
Turning to Wall Street, MCD stock has a Strong Buy consensus rating based on 22 buys, five Holds, and zero Sell ratings. The average MCD stock price target is $310.42, implying 15.5% upside potential.
The Takeaway
While many companies fear a diminishing of consumer sentiment, in many ways, McDonald’s is counterintuitively benefiting from the negative backdrop. As one of the cheapest providers of fast food, the company should enjoy the winds of the trade-down effect. Also, outside factors such as RTO mandates could bolster breakfast sales, which would favor MCD stock.
