Image: McDonald’s stock is soaring, and we think the company is one of the best-positioned for the current inflationary environment.
By Brian Nelson, CFA
Best Ideas Newsletter portfolio holding McDonald’s Corp. (MCD) recently hit all-time highs on news that it would take a close look at the size of its workforce, temporarily shutting its corporate offices in the U.S. in advance of layoffs.
Though not great news for many that may get the pink slip, the market likes the renewed focus on costs. The high end of our discounted-cash-flow derived fair value estimate of McDonald’s stock stands north of $300, and we expect further upside potential in shares, which are trading at ~$280 at the time of this writing.
There are three reasons why we like McDonald’s in this market environment. First, the company is largely insulated from inflationary pressures as it sports a mostly-franchised business model. Second, we like the company’s value proposition, particularly its 6- and 20-piece chicken nugget offerings and its 2 for $2 sausage McMuffin deal, the latter a huge value in this day and age.
Third, McDonald’s free cash flow generation remains in excess of its cash dividends paid, a dynamic that has helped to fuel the company’s multi-decade streak of annual consecutive dividend increases. Though McDonald’s has a large net debt position, the company’s dividend remains respectable, in our view. Shares yield ~2.2% at the time of this writing.
All in all, it’s a great day for this Best Ideas Newsletter portfolio holding!
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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