McDonald’s stock, the oldest of fast-food names, has a new swagger. Business is on a roll, thanks to McDonald’s (MCD) “famous orders” marketing campaign, new digital loyalty program, booming delivery business and recovery in Covid-hit overseas markets. With all that going for it, is now a good time to buy MCD stock?
To help keep the momentum going, McDonald’s announced its latest promotion, starring Mariah Carey, on Wednesday. The campaign features 12 days of deals from Dec. 13-24, with free items from the Mariah Menu thrown in for purchases made via the McDonald’s app.
McDonald’s Stock Is A Defensive Play
McDonald’s has long been considered a defensive play, which means that MCD stock often performs relatively well when growth stocks falter. Yet that presents a dilemma for growth investors.
It’s relatively rare to see MCD stock outperform when the overall market is rallying. For example, MCD stock put together a nice run from August 2018 through August 2019, which saw a broad market correction and relatively muted overall gains.
Consider this: MCD stock has staged three breakouts to record highs since April. Not too shabby. Yet, up until McDonald’s served up strong Q3 earnings on Oct. 27, MCD stock’s relative strength line, the blue line in the chart below that tracks a stock’s performance vs. the S&P 500, had slumped to a six-year low.
In other words, buying MCD stock at a proper buy point doesn’t tend to pay off very well. 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.
McDonald’s Stock Analysis
After reporting stronger-than-expected results on Oct. 27, MCD stock went on a four-day run, carrying it past a 247.15 buy point on Nov. 1 in above-average volume.
Almost two weeks later, McDonald’s stock is still in buy range, which runs from 247.15 to 259.51. In early Friday stock market action, MCD stock slipped 0.2% to 249.67.
This foray past the 247.15 buy point is actually the third for MCD stock. The first, on Sept. 27, was turned back the next day. The second, on Oct. 7, lasted just two sessions. Could the third time be the charm?
McDonald’s Stock Bull Case
On Oct. 5, Loop Capital’s Alton Stump wrote that McDonald’s has gained market share over the past 18 months and should continue to thrive, thanks to its drive-thru model and “aggressive and unique marketing platform.” He started coverage of MCD stock with a buy rating and Street-high 306 price target.
If McDonald’s can combine its rising market share with efficiency gains, yielding higher profit margins, MCD stock could go on a run. McDonald’s has been putting in place a number of key ingredients to get more bang for the buck: more powerful marketing; a new digital loyalty program; and initiatives to improve margins on delivery and drive-thru orders.
Famous Orders
The Dow Jones giant embraced its more aggressivee “Accelerating the Arches” strategy in November 2020, including a stepped-up pace of restaurant expansion, following 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 “famous orders” promotion starring Korean pop band BTS, which ran from late May through June 20, helped fuel Q2 sales. Q3 featured rapper Saweetie’s selection of a Big Mac, four-piece Chicken McNuggets, medium fries, a medium Sprite, and barbecue and sweet ‘n sour sauces. The Saweetie Meal hit restaurants Aug. 9 and was available through Sept. 5.
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” had renewed McDonald’s cultural relevance “that we had maybe let get stale.” The “famous orders’ 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.
Loyalty Program
McDonald’s said on July 28 that 12 million people had already joined its MyMcDonald’s digital loyalty program, which launched 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.
The digital loyalty program also is being rolled out in Germany, Canada, the UK and Australia by mid-2022.
“We’ve seen in the places that where we have deployed loyalty that it absolutely does increase customer frequency,” CEO Chris Kempczinski said on the Q3 earnings call.
Delivery
“Over the past five years, our delivery footprint has grown from just 3,000 of our restaurants to more than 32,000 restaurants across 100 countries,” Kempczinski said on the Q3 call.
“The business has grown by billions and billions” and remains elevated, even as life normalizes after the Covid peak.
While McDonald’s doesn’t disclose a lot of information about its delivery business, restaurant operators in general have seen profits squeezed in a big way by the 3rd-party delivery operators they partner with.
But McDonald’s indicated in the Q3 call that delivery margins could get a lift in the not-so-distant future.
“We are the largest restaurant company in the world that we have an ability to drive traffic on to (3rd-party delivery) apps that we think is second to none, and that should be reflected in the rates that we’re paying.”
“We look forward to sharing more information on these global partnerships soon, but this is yet another example of where our scale confers upon us competitive advantages.”
Drive-Thru
McDonald’s has tested automated order-taking in the drive-thru at a small number of U.S. restaurants, following its 2019 acquisition of Apprente, which was renamed McD Tech Labs.
“These tests have shown substantial benefits to customers and the crew experience,” Kempczinski said on the Q3 call.
To accelerate and scale deployment of automated order-taking, McDonald’s has tapped IBM, which will acquire McD Tech Labs. Details of the agreement weren’t revealed.
How Does McDonald’s Stock Stack Up Vs. Competition?
The Retail-Restaurants industry group has fallen to 94 out of 197 industry groups based on price performance and momentum. The group fell out of the top tier amid labor and food inflation, the delta Covid wave, and the end of fiscal stimulus and pandemic unemployment benefits.
IBD Stock Checkup shows that McDonald’s stock is still a step behind the leaders in the Retail-Restaurants group. McDonald’s stock has a mediocre 67 IBD Composite Rating, with 99 the top rating. That places MCD stock No. 13 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 MCD 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 finally improving. While, the fast-food giant has a history of relatively bland earnings and sales growth, improving results seem to be enticing investors.
Still, McDonald’s stock has a history of underperforming when growth stocks are rallying.
Bottom line: McDonald’s stock is a buy, but not a compelling one, if history is a guide.
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Please follow Jed Graham on Twitter @IBD_JGraham for coverage of the economy and financial markets.
