McDonald’s Stock Up 25% in 2021 – Time to Buy MCD Stock?

The price of McDonald’s stock surged 25% last year as the company managed to recover from the hit it took during the pandemic and delivered better than expected results during the first three quarters of 2021.

According to data from Seeking Alpha, McDonald’s reported sales above the consensus estimate in the first three quarters of 2021 with an average surprise % of 3.4% while it also posted earnings per share that exceeded Wall Street’s forecasts by an average of 9.7%.

Last month, rumors circulated about an effort to hire as many as 12,000 employees in Italy as part of an initiative in that country to open 200 new restaurants. The firm’s goal is to increase its restaurant and headcount to 800 and 40,000 respectively in the next four years.

This country alone is expected to bring at least $1.8 billion in revenue for the fast-food giant in 2021 – a figure that accounts for almost 8% of the company’s forecasted sales for the year.

What can be expected from McDonald’s stock for 2022 now that the pandemic is progressively becoming an item in the rearview mirror? In this article, I’ll be assessing the price action and fundamentals of this food stock to outline plausible scenarios for the future.

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McDonald’s Stock – Technical Analysis

December was an interesting month for McDonald’s stock as the price surged to all-time highs after breaking above a long-dated rising wedge formation dating back to the February-March pandemic crash.

This break above the wedge could indicate that the pattern’s traditionally bearish bias has been invalidated and favors a bullish mid-term outlook for McDonald’s stock as long as the price remains above the 200-day simple moving average.

So far this morning, the price of McDonald’s stock is rising 1% in pre-market stock trading action ahead of what will be the first session of the year as futures of the Dow Jones Industrial Average and S&P 500 index are rising 0.6% and 0.7% respectively.

Momentum indicators favor a bullish outlook as well as the Relative Strength Index (RSI) is standing at 65.6 while the MACD has moved to its highest levels since April 2021.

All things considered, the current technical setup is pointing to an acceleration in the uptrend that has lifted the price of MCD stock progressively since it bounced from its 2020 pandemic lows and this means that the first quarter of 2022 could be positive for the fast-food giant.

McDonald’s Stock – Fundamental Analysis

McDonald’s sales in 2021 are expected to exceed those of 2019 – the year before the pandemic started. This is no small accomplishment as the company’s top-line performance had been either negative or neutral in the years that preceded the health crisis.

Meanwhile, profit margins have also been improving for McDonald’s with gross margins in the past 12 months landing at 53.7% while operating margins have stood above the 40% mark.

The company currently offers a decent 2% dividend yield and generates more than enough cash to cover those distributions. Additionally, the payout ratio is rather low at the moment – standing at 53% – meaning that the company may decide to increase its dividend soon and that could lead to further increases in its valuation.

From the perspective of solvency, McDonald’s long-term debt is rather elevated as it stands at $34.6 billion on assets of $52.7 billion including $4.3 billion in cash and equivalents.

According to the company’s latest annual report, a total of $2.95 billion in obligations including leases and loans are due in 2022. The firm’s cash-flow generation capacity and cash reserves are enough at the moment to fulfill these commitments and therefore solvency risks are low.

However, the market might not be willing to assign a higher valuation multiple to McDonald’s in the future unless the firm reduces its leverage to more manageable levels.

In 2022, the company is expected to report an 8% jump in its adjusted earnings per share compared to the market’s forecasted 2021 figure. Currently, McDonald’s is trading at 26 times its estimated adjusted EPS for this year.

This trading multiple seems rather elevated for the firm based on its forecasted earnings growth. However, it remains to be seen if the latest tailwind that has lifted the company’s financial performance could lead to an improvement in the business’s top and bottom-line profit margins to the extent that justifies this current valuation.

All things considered, the outlook for McDonald’s for 2022 is neutral to bearish from a fundamental perspective.

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