The last few years have brought about sweeping changes in the fast food industry, with a marked shift to drive-thru and pickup transactions. Lingering inflation has also caused many restaurants to raise prices across the board, a factor that is starting to drive away many low-income customers.
Those factors, along with the war in Israel, have caused many fast food companies to struggle over the past few years. As the biggest fast food chain in the world, McDonald’s (NYSE: MCD) has felt all of those pain points to some degree. It’s largely why MCD returned just 10.3% over the past year compared to the S&P 500’s nearly 23% return.
The conflict in the Middle East and sluggish global sales were a driving force behind the disappointing performance. MCD bounced back at the end of 2023, but the stock is down 1.5% so far in 2024.
The company just reported its earnings for the 4th quarter of 2023, but there was little to garner investors’ enthusiasm. Nonetheless, McDonald’s continued to increase its revenue and earnings, and it’s in the midst of a major quality overhaul that could have a big impact going forward.
So where will McDonald’s stock be 12 months from now?
What Made McDonald’s Stock Drop?
Slow global sales continued to affect top line growth comparisons through the end of 2023. McDonald’s reported a global comparable sales increase of just 0.7% from the International Developmental Licensed markets segment, which includes the Middle East.
The McDonald’s franchisee in Israel offered discounted food to Israeli soldiers and that sparked outrage among those who were pro-Hamas. Boycotts spread in Malaysia and Indonesia because both countries have largely Muslim populations.
It went beyond boycotts in some locations, and protests caused McDonald’s to close those restaurants to protect its employees. The troubling thing for McDonald’s investors is that there isn’t an end in sight to the company’s global struggles. McDonald’s leadership expects these issues to last as long as the war does.
It’s positive, however, that the company didn’t see rocky sales elsewhere. Revenue in Asia and the US was as expected. Global same-store sales, a measure of customer loyalty, increased by 3.4% in the quarter. That was still less than the 4.7% increase analysts expected.
Total revenue of $6.41 billion was 8% higher than the same quarter of 2022, but it still came in 0.73% less than the expected $6.45 billion. Diluted earnings per share (EPS) of $2.95 per share was 4.4% better than the estimated EPS of $2.82.
Will McDonald’s Stock Bounce Back?
A significant portion of McDonald’s revenue came from price hikes, and that’s a concern. It’s one of the first quarters where the company’s elevated prices have started to deter low-income customers. The higher prices have been a point of contention in France, where McDonald’s reported significant pushback.
The fast food chain tried to justify its high-cost items by making quality changes to many of its most popular menu items. Rather than changing the ingredients to the company’s well-known burgers, McDonald’s made alterations to the assembly and preparation process to deliver a more flavorful product.
This “best burger” is now available across the US and it’s soon to be offered globally. While many industry experts praised the new initiative, most analysts don’t expect a dramatic change to result from it. It’s still not clear whether customers will consider the new products to be worth the price tag.
Analysts Views On McDonald’s Stock
Even if analysts don’t expect much from the new menu changes, they are still mostly positive about MCD. 71% of analysts rate MCD as a Buy. The highest forecast among 38 analysts projects a 23.3% hike in share price to $357 per share over the next year.
The consensus price target is $325 per share, which translates to a 12.3% increase for McDonald’s shares.
No Sell ratings exist on the stock, but 29% of the analysts assess it as as a Hold. The lowest forecast estimates the stock will rise by just 1.91% over the next 52 weeks to end at $295 per share.
Is McDonald’s Stock Undervalued?
The general view on Wall Street is that MCD will bounce back, and perhaps that’s because they expect McDonald’s woes in the Middle East to improve.
It could also be due to the company’s increase in spending which will result in 8,800 new locations by 2027. McDonald’s has boosted its expectation for capital expenditures in 2024 to $2.5 billion.
The company currently has a price-to-earnings value of 25x, which is slightly less than Starbucks and Restaurant Brands International (owner of Burger King). Both of those competitors have P/E values above 26x.
MCD has been a long-time dividend stock as well, and the current annual dividend yield stands at 2.31%. That means a $1.67-per-share quarterly payout for McDonald’s investors.
Where Will McDonald’s Stock Be 1 Year From Now?
According to 32 analysts, McDonalds stock can rise to as high as $324.22 per share, the consensus fair value.
McDonald’s is one of the best-known brands in the world, but the company has struggled lately. It increased the quality of its food but it also boosted its prices, and that has driven away many lower-income customers. The Israel-Hamas war has been attributed to lower global sales, and those issues are likely to persist.
McDonald’s still increased sales and earnings in the final quarter of 2023, and the company is spending big to increase its reach in 2024. It’s still up in the air whether the fast food giant can entice some lower-income customers back with its higher-quality products.
Because of those uncertainties, the consensus of a 12% gain for MCD seems like a plausible target. However, given the AI anticipation that’s driving up tech stocks, it’s likely that McDonald’s will end up underperforming the S&P 500 again this year.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.