McDonald's Corporation’s MCD current valuation is enticing for the investors to look into it. The stock is currently trading at a discount compared with the Retail-Restaurant industry peers. The company’s forward 12-month price-to-earnings (P/E) ratio is 24.51X, which is below the industry average of 27.05X and the broader Retail-Wholesale sector’s 24.95X.

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McDonald's witnessed a setback due to the E. coli outbreak announced by the Centers for Disease Control and Prevention in October 2024. However, the immediate action taken against this catastrophe somewhat reinstated the consumers’ confidence in the brand. The company prioritizing food safety and implementing relative business initiatives to recover the loss from the incident is boding well.

In the past three months, MCD stock has gained 3.1%, underperforming the sector’s 5.4% growth. However, during the same time frame, the company surpassed the industry’s 1.4% growth and the S&P 500 index’s 0.4% decline. Moreover, MCD stock’s performance outshined a few of the prominent industry players including Chipotle Mexican Grill CMG, Kura Sushi USA, Inc. KRUS and Restaurant Brands International Inc. QSR. The detailed price performance of the industry players is shown in the chart below.

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Concerns Regarding McDonald's’ Prospects

The company’s stock performance hit a major setback after the E. coli outbreak announcement on Oct. 23, 2024. The outbreak was linked to MCD’s Quarter Pounder burgers using slivered onions from one supplier, which happened to have majorly affected the Midwest U.S. regions. Notably, this incident resulted in 10 hospitalizations and one fatality. To calm the chaos rightfully, McDonald's took prompt action by removing the supplier from the supply chain. Although the move was encouraging given the brand’s reputation, it has been a consequential task to gain back the consumers’ confidence.

This incident adversely impacted the company’s U.S. comps sales in the fourth quarter of 2024, which were down 1.4% against 4.3% growth in the year-ago quarter. This decline, accompanied by 0.1% comps growth in the International Operated Markets due to negative comparable sales in some markets, led by the United Kingdom, marred the global comps growth during the quarter. In the fourth quarter, global comp sales inched up 0.4% compared with a 3.4% rise in the year-ago quarter.

Additionally, the company is expected to witness inflationary pressures, especially in the form of elevated costs across food, paper and labor. This is expected to pressure the margins moving into 2025 to some extent.

Estimate Trend of MCD

Backed by the ongoing efforts to foster business growth and expand margins, despite the lingering macro headwinds and inflation risks, the earnings estimate for 2025 indicates 4.4% year-over-year growth. Although the year’s estimate reflects a downward revision, the growth trend compared with the 2024 reported value induces optimistic sentiments among investors. The estimate revision trend can be understood in detail from the chart below.

Earnings Estimate Revision

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Factors Aiding McDonald's

McDonald’s is the world’s largest chain of fast-food restaurants, with a presence in more than 100 countries. Its offerings have reached the billion-dollar brand status through sustained product innovation and geographic expansion. The brand recognition has helped the company gain positive results in its Arches campaign strategies, especially Accelerating of Arches, initiated in its top markets across the globe, thereby driving growth. The successful execution of the Accelerating the Arches strategy is driving increased customer demand and market share gains across major markets.

Notably, apart from focusing on value offerings and driving full-margin menu innovation strategies, the company is largely ensuring ways to maintain food safety, which has always been its primary priority. Post the catastrophic incident, it is undergoing various moves to gain back the trust of its customers, which is on the positive side given its prompt action regarding the supplier. McDonald's expects to recover completely from the fallback by the second quarter of 2025 and will realize benefits across the business through its strategic initiatives. Such a positive attribute of the company must not be overlooked by the investors.

There are other noteworthy factors of the company that are expected to drive growth through 2025 and beyond. In January 2025, it launched its McValue platform in the United States to provide consistency and compel customers with flexibility over choices. By the first quarter of 2025 end, the company aims to enhance its value programs across several international markets to increase customer engagement and foster traffic growth. Notably, since the launch of its loyalty program, the total number of 90-day active users has reached more than 170 million. In 2024, the system-wide sales to loyalty members were about $30 billion. It anticipates reaching 90-day active users of 250 million with $45 billion in annual loyalty system-wide sales by the end of 2027.

Also, the drive-thrus under the delivery section are one of the primary sales drivers of McDonald's. It houses most drive-thru locations across the globe, with more than 27,000 drive-thru locations globally, including nearly 95% of the approximately 13,500 locations in the United States. MCD continues to build on and enhance the delivery experience for its customers, which includes adding the ability to place a delivery order in the mobile app. It is optimistic in this regard and anticipates the initiative to drive growth in the upcoming periods.

What are the Thoughts on Investment?

Per the discussion above, investors might be having second thoughts about MCD stock given the market trends and comps performance, post the E. coli outbreak. The company’s performance was significantly impacted by this adverse occurrence, from which it is taking some time to recover.

On a positive note, McDonald's is continuously trying to win back the customers’ confidence, which it already started by taking prompt action against the supplier of the slivered onions. Given the ongoing efforts like the effective implementation of the Accelerating of Arches strategy, prioritizing food safety, investing in digital sales-driving initiatives and much more, the company expects to overcome the negative impacts of the outbreak. It expects to realize benefits from its strategic investments and witness sales growth and margin expansion in the upcoming quarters.

Thus, by considering both sides of the coin, it is prudent for existing investors to hold on to this Zacks Rank #3 (Hold) company’s shares for now, whereas new investors might want to wait for a more favorable entry point.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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McDonald's Corporation (MCD) : Free Stock Analysis Report

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This article originally published on Zacks Investment Research (zacks.com).

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