Over the last five years, the McDonald’s share price (NYSE:MCD) stock has climbed from around $180 to $292. That represents a return of over 60%, which is a considerable gain for a mature fast-food company. Is the stock overvalued at today’s share price? Let’s discuss.
Analysing McDonald’s stock
One of the best ways to determine whether a stock is overvalued is to look at its price-to-earnings (P/E) ratio. This valuation ratio – which measures the price of a stock per every $1 of earnings – allows us to compare a company’s valuation to the valuations of other companies and the market as a whole.
Now, for 2024, McDonald’s is expected to generate earnings per share of $12.50. This means that at its current share price of $292, the stock’s forward-looking P/E ratio is approximately 23.4. So, what does this multiple tell us about the company’s valuation?
Well, the valuation is quite high right now. At present, the median forward-looking P/E ratio across the S&P 500 index is about 17.8. So, McDonald’s currently trades at a considerable premium to the market.
However, I will point out that McDonald’s is a high-quality business. Not only does it have a high return on capital (meaning it’s very profitable), but it also has a strong dividend track record (over 40 consecutive annual dividend increases). So, the higher valuation could be justified here.
It’s worth noting that many of the company’s rivals sport similar, or higher, P/E ratios. Here’s a look at some comparisons:
- Domino’s Pizza – 26.6
- Restaurant Brands International (which owns Burger King) – 22.4
- Chipotle Mexican Grill – 43.5.
Looking at these earnings multiples, McDonald’s isn’t overvalued on a relative basis.
Personally, however, I feel that the multiple of 23.4 is a tad high. In my view, a P/E ratio of around 20 would be more appropriate for this stock.
Is McDonald’s a good stock to buy?
From an investment perspective, McDonald’s has a number of things going for it.
For starters, the company is relatively immune to economic weakness. Thanks to its low prices, it attracts customers even when economic conditions are weak. As a result, it’s quite a stable stock. This is illustrated by its ‘beta’ of 0.72 (a beta of 0.72 indicates that the stock is far less volatile than the broader market).
Secondly, it has a great track record when it comes to generating shareholder wealth. Over the long term, the stock has generated strong capital gains and also paid out regular growing dividends. Given its superb dividend growth track record, it’s classified as a ‘Dividend Aristocrat’.
Like any stock, however, it’s not perfect. One issue to be aware of here is that revenue growth has stalled in recent years. For the company to hold on to its premium valuation, top-line growth will need to pick up.
Will McDonald’s stock rise in 2024?
While McDonald’s stock has been an excellent long-term performer, it’s hard to know if it will rise in 2024. On one hand, the stock is in a strong uptrend. On the other hand, the valuation does look quite full.
Many Wall Street analysts expect the stock to continue rising, however. Currently, the average price target of the 32 analysts covering the stock is $325. That’s about 11% above the current share price.
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
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