Is McDonald’s Still a Value Play After Global Expansion and Menu Innovation News?
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Curious if McDonald’s is still a meal deal in today’s market, or if the price at the window is higher than it’s worth? You’re not alone. A lot of investors are asking the same question about its share value right now.
The stock has eased back slightly, down 0.7% over the last week and 1.1% in the past month, but it’s still up 4.1% year-to-date and has delivered a solid 55.4% return over five years.
Recent news about McDonald’s ongoing global expansions and new menu innovations has continued to fuel investor interest. On top of that, the company’s efforts to boost digital sales and streamline its franchise operations are attracting attention across the quick-service industry.
Currently, McDonald’s has a valuation score of 2 out of 6, based on our undervaluation checks. Let’s break down what this really means by looking at different valuation methods, before revealing an even smarter way to assess its fair value at the end of this article.
McDonald’s scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.
The Discounted Cash Flow (DCF) model estimates a company’s value by projecting its future cash flows and discounting them back to reflect their value today. This approach gives investors a sense of what the business is truly worth, based on the cash it is expected to generate.
For McDonald’s, the current Free Cash Flow stands at approximately $7.8 billion. Analysts forecast this figure will steadily increase, reaching over $10.6 billion by 2028. Longer-term projections, extrapolated beyond five years, are also trending upward. These growth estimates suggest that McDonald’s should continue generating substantial cash into the next decade.
Based on the 2 Stage Free Cash Flow to Equity model, the DCF valuation calculates an intrinsic value of $263.35 per share. When compared to the current market price, this indicates the stock is about 15.7% overvalued according to this method.
The Price-to-Earnings (P/E) ratio is a preferred valuation metric for profitable companies like McDonald’s because it directly relates the share price to the company’s earnings. This offers a clear picture of how much investors are willing to pay for each dollar of profit. The P/E ratio can be a quick benchmark for comparing similar companies, provided earnings are positive and relatively stable.
What qualifies as a “normal” or “fair” P/E ratio depends on several factors. Companies with higher expected growth or lower perceived risk typically trade at higher P/Es, while those with slower growth or higher uncertainty have lower ratios. By considering both prospects and pitfalls, the P/E becomes an indicator of market sentiment about future earnings.
McDonald’s currently trades at a P/E of 25.8x. This is above the Hospitality industry average of 20.8x, but below the peer group average of 53.1x. Rather than relying solely on these benchmarks, Simply Wall St’s proprietary Fair Ratio is 29.3x for McDonald’s. This Fair Ratio accounts for variables like projected earnings growth, industry positioning, profit margins, overall market cap, and key business risks. It offers a more tailored and accurate valuation gauge than standard peer or industry averages.
Comparing the current P/E of 25.8x to the Fair Ratio of 29.3x, McDonald’s is trading at a slight discount. This suggests the stock may be undervalued relative to its fundamentals and outlook.
Earlier we mentioned that there’s an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your chance to tell the story behind the numbers by summarizing why you believe McDonald’s deserves a specific fair value, based on your expectations for its future revenue, earnings, and profit margins.
This approach brings financial analysis to life by connecting a company’s underlying story to real forecasts and valuations, giving clarity on why you think McDonald’s is worth more (or less) today. Narratives are easy to create and share on Simply Wall St’s Community page, used by millions of investors to compare perspectives and track their thinking over time.
With Narratives, you can act when the current price diverges from what your story tells you is fair value. This helps you decide when to buy, hold, or sell, all with live updates as new earnings or news emerge. For example, some believe McDonald’s global tech and menu innovations justify a bullish $373 fair value, while others, wary of competition and margin risks, set their narrative closer to $260, showing how outlooks can lead to very different conclusions.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include MCD.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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