McDonald's (NYSE: MCD) stock got a nice bump on earnings yesterday, but I’m not buying it.
At first glance, the earnings report looks better than decent, highlighted by a 0.4% increase in global sales when analysts had anticipated a decline.
The wild card was international developmentally licensed markets — overseas restaurants operated by local partners — which saw a 4.1% increase in sales.
Back home, though, McDonald's continues to struggle. U.S. comparable sales fell 1.4% as the company worked to lure back wayward customers at the expense of profit margins.
Indeed, throughout last year, McDonald's was shamed on social media and name-checked by politicians for price gouging. It also suffered an E. coli outbreak that further put a damper on things.
In response, the company ended the year with a renewed emphasis on value. It extended its $5 meal deal launched in June into December, and last month introduced the “McValue” menu with more discount items.
Customer traffic in the U.S. improved slightly as a result, with the trade-off being that customers spent less.
That kept fourth-quarter revenue flat at $6.4 billion, while net income fell 4%, to $2 billion, or $2.80 per share. Both of those figures were short of expectations.
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It’s possible McDonald's could regain some momentum — but only if the economy deteriorates. If the job market, which has been strong for the past few years, were to reverse course, the restaurant’s value offerings could draw enough traffic to compensate for the lower margins.
Of course, if things get too bad, you run the risk of diners not eating out — yet another tightrope the company has to walk.
That’s why I think investors looking to invest in fast-food or fast-casual space would be better served with a stock like Cava (NYSE: CAVA).
Cava’s Mediterranean rice, salad, and grain bowls have proven to be more appealing — especially among younger clientele.
Its revenue rose 35% in the last quarter, while net income roughly tripled and same-store sales jumped 14%. The company also has an ambitious growth plan to expand its footprint from 341 locations currently to 1,000 by 2032.
That’s why Cava stock is up 160% in the past year, compared with just 6% for McDonald's. It’s set to report earnings on February 25.
Meanwhile, McDonald's continues to languish.
It’s not alone, either. A lot of traditional fast-food restaurants, including Burger King and KFC, are struggling with the same issues, suggesting they’ve fallen out of favor…
Maybe irreparably.
So McDonald's stock may be enjoying a nice boost today, but I wouldn’t bet on it long term.
Fight on,
Jason Simpkins
Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…
In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor's page.
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