McDonald’s Corporation (MCD, Financial) recently reported earnings results that easily outperformed what the company produced in the second quarter of last year. Of course, last year had the challenge of the first wave of the Covid-19 pandemic, so year-over-year growth doesn't mean much. Showing growth against this period was a very low bar to clear.
However, McDonald’s numbers were up even against the same period of 2019, showing that the company has more than rebounded from the worst of the pandemic. Shares of the company aren’t cheap, and haven’t been for some time, but in my opinion, McDonald’s most recent quarter and the strength of its business make it reasonable to purchase more of the stock even at the current levels.
Earnings highlights
McDonald’s reported second-quarter earnings results on July 28. Revenue grew almost 57% to $5.9 billion year-over-year, topping Wall Street analysts' estimates by $320 million. This was the highest revenue total since the second quarter of 2017. Reported net income of $2.2 billion, or $2.95 per share, compared very favorably to net income of $483 million, or 65 cents per share, in the same period a year ago. Earnings per share were also 84 cents better than expected.
Systemwide sales, which accounts for total sales from company-owned stores as well as franchised locations, grew 48% to $28.3 billion. Even adjusting for favorable currency exchange, systemwide sales grew 42%.
Global same-store sales improved 40.5% compared to consensus estimates of 38.7%. The growth was 6.9% on a two-year basis. U.S. comparable sales increased 25.9%, ahead of estimates of 23.1%. Same-store sales were higher by 14.9% compared to the second quarter of 2019, proving that this past quarter’s results weren't just good against a weak period.
International Operated Markets surged 75.1% from last year and 2.6% from the prior year. Relative to 2019, this segment benefited from strong performances in the U.K., Australia and Canada that were only partially offset by weakness in France and Germany
International Development Licensed Markets was up 32.3% from the same period of 2020 and 0.3% from 2019. All regions were positive on a two-year basis, led by Brazil, China and Japan.
McDonald’s ended the period with total assets of $51.9 billion, current assets of $5.7 billion and cash and equivalents of just over $3 billion. Total liabilities amounted to $57.7 billion, including current liabilities of $3.9 billion. Total debt was $49.3 billion, but just $500 million is due within the next year.
The company didn’t provide guidance for the year, but analysts surveyed by Yahoo Finance expect McDonald’s to earn $9.06 per share in 2021. This would be a 50% increase from last year and a new company record.
Takeaways and valuation analysis
McDonald’s turned in one of its best quarters in quite some time. Yes, the company was facing fairly easy comparable numbers, but growth was found almost everywhere, and against pre-pandemic results as well. Same-store sales across the three segments was higher against 2019 with the vast majority of top markets seeing an increase.
McDonald’s accomplished such results because of its value that it offers, something that appeals in both times of economic expansion or contraction. Along with this, McDonald’s offers consumers numerous ways to get their orders. For example, delivery has greatly expanded and is now available at more than 80% of 100 global markets. Consumers can also order ahead and pick up their items curb side as well.
Digital sales continue to be a significant driving force for the company. The company has 22 million active MyMcDonald’s users in the U.S., with 12 million already enrolled in its newest loyalty program. Underscoring how vital digital has been to McDonald’s, the company’s digital systemwide sales were just under $8 billion for its top six markets in the first half of 2021. This was a 70% increase from the prior year.
The company’s new loyalty program is already in place in the U.S. and France, with plans to expand to Germany, Canada, the U.K. and Australia by the end of 2022. Seeing how well this program has operated in a semi-limited capacity should excite shareholders at the possible tailwinds from this channel.
One headwind is the cost of doing business. Costs are increasing for the company, both in terms of raw materials and personnel expenses. For the quarter, company-owned restaurant costs increased 20% to $3.8 billion and franchised restaurants expenses were up 7% to $1.2 billion. McDonald’s is also committed to raising its minimum wage to $15 per hour by 2024, but some locations are already at this or above due to workers no longer finding it economically feasible to survive on $7.25 an hour. This will likely be an issue in the short run, but in the long run, more people being able to afford food is good for all companies,
Of course, the market is aware of McDonald’s success and leadership position in the quick service restaurant industry and has bid shares higher. The stock has also more than doubled over the last five years. With the stock closing at $240.28 on Tuesday, McDonald’s has a forward price-earnings ratio of 26.5 based on analysts’ estimates for the year.
The stock has five- and 10-year average price-earnings ratios of 24.6 and 21.4, respectively, so McDonald’s isn’t overly expensive compared to its historical averages. Combine this with the company’s dividend growth streak of 45 years and the stock’s market-beating yield of 2.1% and I feel that McDonald’s warranted purchase even with an elevated valuation. I added to my position in the name at a price of $239.29 on Aug. 17. I would be looking to add more McDonald’s on any pullback.
