While large-cap technology stocks outperformed in the first half of 2024, more defensive names like McDonald’s (NYSE:MCD) stock have gotten left behind. There’s been no fast money from fast food this year so far, but perhaps McDonald’s investors can get a good value now.
It’s not difficult to identify McDonald’s greatest post-pandemic enemy: food-price inflation. Anyone who didn’t consume fast food for a few years and then recently ordered a Big Mac might have suffered from sticker shock.
Amid this challenging backdrop, McDonald’s needs to be proactive in getting frustrated customers in the door. While the fast-food giant can’t control beef and chicken prices, maybe it can at least manage its image and meet budget-conscious consumers halfway.
Customers ask: Where’s the beef?
One of McDonald’s more interesting experiments was its partnership with Beyond Meat (NASDAQ:BYND). Together, the two companies brought McDonald’s customers the McPlant burger.
That menu offering might sound great in theory, but during a time of persistent food-price inflation, it’s often cheaper to eat real meat than fake meat. Even beyond the pricing differential, McDonald’s U.S. customers might simply not be as enamored of healthy fast-food options than their European counterparts.
Joe Erlinger, McDonald’s U.S. chief, observed that a test of the McPlant burger in San Francisco and Dallas “was not successful in either market.”
While McDonald’s asserts that plant-based food offerings have fared better in European markets, Erlinger reported that U.S. consumers aren’t looking for “McPlant or other plant-based proteins from McDonald’s.”
Again, price is paramount during these challenging times for struggling families.
“Some of it’s driven by affordability… Chicken is less expensive to produce, and so for a consumer that’s looking for more affordable food, chicken is a great option right now,” Erlinger acknowledged.
That’s one pricey burger
In case you haven’t noticed, one thing McDonald’s restaurants generally haven’t done is bring their food items back to pre-COVID-19-pandemic levels.
According to Erlinger (via The Wall Street Journal), the “average price of a Big Mac sandwich has increased 21% to $5.29 from 2019 level prices,” and a “10-piece McNuggets Meal costs around $9.19, up 28%” since 2019.
Moreover, while I can’t confirm this, I suspect that there may be some “shrink-flation” occurring in McDonald’s food portions. In any case, McDonald’s has unfortunately abandoned its popular dollar menu and replaced it with $5 value meals, which may or may not fill up an average adult.
The $5 meal offerings might be too little, too late for low-income customers. As of May 2024, the average price of food eaten away from home increased 30% since May of 2019.
On the other hand, the $5 McDonald’s meals might be just what the doctor ordered. An online survey from May found that over “one-third of regular fast-food consumers said they would seek out the McDonald’s $5 meal,” The Wall Street Journal reported.
July’s results will be a proving ground for McDonald’s $5 value meal experiment. Evercore ISI analyst David Palmer sees July as a “pivotal month for the fast food industry” in determining whether the “$5 meal bundle is enough to accelerate industry sales.”
Thus, McDonald’s investors should keep a close eye on this year’s summertime sales trends. Ultimately, it won’t be the $5 value meals themselves that will likely benefit McDonald’s long-term, but rather, the repeat visits afterward.
“You’re not making money on the value menu. You’re making menu money on the other products, the more premium products, the dessert products, the beverage products that go along with that,” explained R. J. Hottovy, head of analytical research at Placer.ai, to Yahoo! Finance.
Is McDonald’s stock really a good value?
Some of us might enjoy a $5 value meal, but the billion-dollar question is whether McDonald’s stock is a good value right now. Income investors can certainly feast on McDonald’s 2.5% forward annual dividend yield, but bargain hunters may be hungry for a summertime dip-buying opportunity with MCD stock.
As it turns out, McDonald’s has a GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio of 21.64, which is somewhat higher than the sector median P/E ratio of 17.72.
If you’re looking for something more in line with the median, then you might consider Wendy’s (NASDAQ:WEN), which has a P/E ratio of 17.27. McDonald’s
Consequently, investors might choose to wait for McDonald’s stock to drop a little more before considering a share position. Along with that, it’s wise to wait and see whether McDonald’s $5 value meals bring delectable repeat business or only leave a bad taste in the customers’ mouths.
