Buy McDonald's And Steve Madden For These Compelling Reasons

Includes: MCD, SHOO
by: Stock Gamer

In this article, I will run you through my comparable analysis for two undervalued stocks with very solid fundamentals. Despite that the supporting reasons appear to be compelling, for you as an investor, further research is still warranted on your part before pulling the trigger.

McDonald's Corporation (NYSE:MCD)

Shares of MCD have declined 11.76% YTD amid overall equity market weakness. At $88.53 per share, the stock is trading at 9.8x the NTM EBITDA and 15.6x the NTM EPS. Consensus estimates predict the revenues, EBITDA, and EPS to grow at a 2-year CAGR of 4.5%, 6.3%, and 8.0%, respectively. Accounting for those, MCD trades at a PEG of 1.6x, which appears to be high at the first glance. But compared to the average PEG of 1.4x from its US peers (see below), the valuation is actually quite reasonable.

Compared with the peer group's average financial performance, MCD has a slower growth potential ahead. But the firm has a superior profitability and a very solid liquidity position relative to the peer group. Given MCD's prestige brand and solid global presence, it makes sense for the stock to trade at a slight valuation premium to the peers. However, the relative valuation model shown below actually requires a discount of 13.9% so as to justify the current stock price of $88.82, suggesting that the market is likely over-discounting the firm's relatively slower growth prospects.

Steven Madden (NASDAQ:SHOO)

SHOO shares have plunged 27.01% over the past 12 months. At the price of $31.75, SHOO trades at 6.4x the NTM EBITDA and 11.5x the NTM EPS. Analysts expect a solid growth ahead for the company with revenues, EBITDA, and EPS forecasted to grow at a 2-year CAGR of 17.6%, 17.9%, and 16.4%, respectively. Taking those into perspective, the stock is fairly valued at 1.0x PEG.

But compared with its peers (see below), the firm outperforms in many of the growth, profitability, and liquidity measures. As such, the superior financials should warrant a sizable valuation premium. However, based on the model, the valuation at current price of $31.75 is at 10.2% discount to both the peer average P/E and EV/EBITDA multiples.

In addition, SHOO's estimated revenues, EBITDA, and EPS have demonstrated a solid upward trend over the past 18 months as shown below.

The discounts that MCD and SHOO trade with indeed provide investors a solid margin of safety as these stocks should bear a premium valuation given their superior fundamentals relative to the peers. I recommend buying the MCD stock as it has a 3.2% dividend yield, and using an out-of-money put option to establish a position for SHOO. In the latter case, if the price remains above the strike at expiration, the premium is earned. In the case that price goes below the strike at expiration, the shares can be acquired at a more attractive valuation.

The comparable analysis tables are created by author and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg, CapitalIQ and Morningstar.

Disclosure: I am long MCD.

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