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McDonald's Is Not Expensive At $155

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Individual Trader


  • This company has what it takes when it comes to share price performance when money contracts.
  • In saying this, we don't seem to be near a cyclical top in U.S. equities. MCD will continue to charge higher.
  • Sentiment backs up my argument as, despite the share price run-up, the stock doesn't look overbought at all.

McDonald's Corporation (NYSE:NYSE:MCD) is up a whopping 28% year to date and appears as if it will go higher. The company announces its second-quarter earnings on July 25, where earnings, revenues and guidance numbers will be watched closely. In the company's first-quarter results, MCD really hit the mark with sales comps returning to former glory due to more focus on the quality/value premise, as well as the All Day Breakfast initiative gaining traction. I believe investors who are wary of the company's valuation and higher debt load need to focus on the company's fundamentals, which illustrate to me that there seems to be little downside risk here.

Operating margins continue to increase and, as customers get more tech savy, one would feel as if MCD's digital ordering initiative will only grow meaningfully from here. Long-term debt increased to $27 billion in the company's latest quarter, which means the balance sheet from an equity perspective looks to be at its weakest point over the past decade.

However, with the decision to re-franchise the lion's share of the company's own restaurants, as well as target significant savings in the SG&A section of the income statement, cash flow has remained buoyant to the degree that the company pulled in over $4 billion in free cash flow last quarter. This company will remain in bull mode far longer than many believe. Here is are some arguments to back up my thesis.

For example, although MCD's current earnings multiple of 27.4 is well above the company's five-year average of 19.7, this stock has proven itself to be a proven performer when times gets tough. What do I mean by this? Well, if U.S. equity markets were to fall meaningfully, MCD would hold up better than many. In fact, the restaurant chain's earnings multiple back in 2007 was actually over 30, but because earnings practically doubled

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MCD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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