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Should You Avoid McDonald's Stock, Even Near a 4-Year Low?
Key Points
The shares have rebounded modestly since trading at a multiyear low.
Economic conditions have been difficult.
McDonald's shares trade at a lower valuation compared to its 10-year median.
Not all stocks trading at multiyear lows warrant an investment. In fact, most probably don't.
Still, it's worth investigating to see if the market has focused too much on short-term issues. McDonald's (NYSE: MCD) stock price plunged to under $230 a share about a month ago. That's the lowest price in several years.
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While the price has rebounded somewhat, the stock has dropped 9% this year, through Nov. 5. During this period, the S&P 500 index has gained 7%.
Should long-term investors view this as a buying opportunity?
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McDonald's franchises 95% of its more than 46,000 restaurants, collecting rents and royalties (based on a percentage of sales). That means customer traffic and spending are very important to the company's results.
With consumers squeezed by higher prices, McDonald's has seen tough traffic trends. The company's second-quarter U.S. same-store sales (comps) grew a tepid 0.8%, driven entirely by higher spending, with guest counts dropping.
The company recently reported third-quarter results, which showed that U.S. sales remained challenging. The region's comps dropped 0.2%, driven by fewer customers. Still, having a large presence around the world has benefits. Globally, comps increased 1.5%.
However, there are broader economic reasons for the flattish sales. The U.S. consumer has been stretched by inflation. With people paying more for items like gasoline, they've cut back on other areas, like eating out.
When economic conditions improve, they'll undoubtedly go back to eating at McDonald's, based on its relatively low prices, fast service, and ubiquitous presence. After all, they haven't shunned McDonald's outside of the U.S.
Meanwhile, the shares trade at an attractive historical valuation. McDonald's stock has a price-to-earnings (P/E) ratio of 22 versus its 10-year median multiple of 26.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.