McDonald’s (MCD) started the week with a bang releasing results from its 3rd quarter. The company beat analysts’ estimates through a series of price hikes to give sales a much-needed lift. That being said, there is concern that customers won’t tolerate these prices in the long term.
The fast food chain reported revenue of $6.69 billion, a 14% growth year over year. This also beat the forecast of $6.56 billion. Meanwhile, profitability was up as well – with adjusted earnings of $3.19 per share compared to the consensus of $3 per share.
McDonald’s took this opportunity to raise its operating margin forecast as well, albeit incrementally from 46% to 47%. This suggests that the company intends to continue raising prices, as they also noted that they expect operating costs to rise in the quarter ahead.
That being said, investors and analysts alike have raised concerns over the pricing model McDonald’s is using. Customers choose the fast food chain for its low prices – how much longer will Mcdonald’s be viewed as the “cheap choice”?
CFO Ian Borden spoke to this worry, saying that McDonald’s prices will come down with inflation. It’s true that customers are becoming more price-sensitive – but in general, this is something that benefits McDonald’s. Higher-income consumers are trading down to McDonald’s over more expensive dining options.
This morning’s news sent shares of MCD more than 2% higher. Looking at the bigger picture, though, the stock is down more than 10% in the past few months.
So, if you’re currently invested in McDonald’s, should you be concerned about the company’s pricing strategy working against itself?
We’ve taken a look at MCD through the VectorVest stock forecasting software and uncovered 3 things that will help you determine what your next move should be with this stock.
MCD Has Good Upside Potential and Safety With Fair Timing
The VectorVest system simplifies your trading strategy by giving you all the insights you need to make clear, calculated decisions in just 3 ratings. These are relative value (RV), relative safety (RS), and relative timing (RT).
Each rating sits on a scale of 0.00-2.00 with 1.00 being the average. This makes interpretation quick and easy. Or, you can simply rely on the buy, sell, or hold recommendation VectorVest offers for any given stock, at any given time. As for MCD, here’s what we found:
- Good Upside Potential: The RV rating compares a stock’s long-term price appreciation potential (projected 3 years ahead) to AAA corporate bond rates and risk. It offers far superior insights than a simple comparison of price to value alone. MCD has a good RV rating of 1.15.
- Good Safety: The RS rating is an indicator of risk. It’s derived through an analysis of the company’s financial consistency & predictability, debt-to-equity ratio, business longevity, sales volume, price volatility, and other risk factors. As for MCD, the RS rating of 1.11 is good.
- Fair Timing: The RT rating speaks to a stock’s price trend - both direction and strength. MCD has a below-average RT rating of 0.94, which is deemed just fair. The rating is based on the direction, magnitude, and dynamics of the stock’s price movement day over day, week over week, quarter over quarter, and year over year.
The overall VST rating of 1.06 is deemed fair for MCD, but places the stock and its investors in a state of limbo - VectorVest considers it a HOLD at this time. You should wait for a more meaningful price trend to form before doing anything else with this stock.
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VectorVest advocates buying safe, undervalued stocks, rising in price. MCD may have beaten the consensus for 3rd quarter earnings, but they had to raise prices to do it - sparking concern over the company’s long-term trajectory with this strategy. The stock has good upside potential and safety, but the timing is just fair right now.
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