Since the beginning of April, shares of McDonald's (NYSE: MCD)
have managed to just about keep their head above water, while the benchmark S&P 500 index has shed close to 20% of its value. This comes against the backdrop of soaring inflation prints, a hawkish Federal Reserve and rising interest rates. You’d have been forgiven for thinking at first glance that a consumer stock like McDonald's might find itself a casualty of a rising interest rate cycle, but there are more reasons than not to suggest that the opposite might in fact be true.
Just like with discount retailers, when there’s a squeeze on the pockets of middle and lower-class Americans, cheap fast food is actually one of the last things to go. This is the thinking behind several bullish comments that have come out on the home of the Big Mac in recent weeks, and investors forecasting a stormy second half of the year would do well to take notice.
The team over at Argus reiterated their Buy rating on McDonald's stock in the middle of last month and kept it on their Focus List of stocks. Underpinning the confidence in the company, the team there prefers large restaurant chains like McDonald's that offer value menus, spend heavily on advertising and have clean balance sheets.
Analyst John Staszak and team expect McDonald's to endure a period of soft industry sales better than most other restaurant chains due to its strong digital, delivery, and drive-thru businesses. This is similar to the thinking that had McDonald's and many of their fast food peers rapidly recovering their COVID inspired losses during the summer of 2020.
Argus also praised the restaurant operator for continuing to adapt and pivot so easily to changing market conditions. While drive-thrus have provided about 70% of revenue for decades, Staszak noted simplified menus during the pandemic have enabled McDonald's to increase the number of orders it can process. The company has also invested in deliveries and in mobile ordering payment systems to help propel sales. McDonald's also found its way into Wells Fargo’s Recession Portfolio last month, in its consumer discretionary sector. Considering its shares are only down about 7% from the all-time highs they set last December, they’re well entitled to be part of that list.
Indeed, looking at the technical setup playing out before us on the daily chart, we can see the stock has been steadily setting higher lows and lower highs, meaning the trading channel is narrowing and we’re likely to see a breakout in the near term. The team over at Atlantic Equities are calling for this to be a breakout to the upside.
The firm upgraded McDonald's to an Overweight rating from Neutral last week on the basis that it is both a defensive value play and a leader in the global quick-service restaurant space. The restaurant chain is seen adding to its market share in an economic downturn and even improving its margins when many other companies are experiencing the opposite.
Analyst Edward Lewis wrote in a note to clients that “as the global consumer softens, companies who operate resilient business models and also have a wealth of experience at managing through such challenging periods come to the fore. McDonald’s is such a name with a dominant position in the global QSR category, which has remained resilient during periods of consumer softness, and decades of experience at managing through such periods across what is now a stable of >40k units.”
Their price target of $278 suggests there’s upside to be had in the region of more than 10% from where shares closed last week, and were they to hit that they would be back at fresh all time highs. Not a bad forecast for investors to be considering as the S&P lingers within 3% of its multi-year lows.
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