One veteran restaurant expert cautions that McDonald’s stock (MCD Stock) may get stale soon. The Golden Arches stock (NYSE:MCD) was put on “90-day negative catalyst watch” by Citi analyst Jon Tower on Tuesday.
Tower’s analysis comes at a time when the Dow Jones Industrial Average component has been a comparatively safe haven: McDonald’s stock, MCD shares have increased marginally over the past six months, while the Dow has declined by 16%.
The relative outperformance indicates that investors should continue with McDonald’s due to its consistent dividend (yield: 2.3%) and the belief that during a recession, consumers will switch to less expensive meals. Additionally, McDonald’s received praise from the Street for its strong sales performance in the first half of the year.
MCD Stock Performance
One veteran restaurant expert cautions that McDonald’s stock may get stale soon.
The Golden Arches stock was put on “90-day negative catalyst watch” by Citi analyst Jon Tower on Tuesday.
Tower’s analysis comes at a time when the Dow Jones Industrial Average component has been a comparatively safe haven: $MCD shares have increased marginally over the past six months, while the Dow has declined by 16%.
The relative outperformance indicates that investors should continue with McDonald’s due to its consistent dividend (yield: 2.3%) and the belief that during a recession, consumers will switch to less expensive meals. For its strong sales trends in the first part of the year, McDonald’s received praise from the Street as well.
But, according to Tower, that feeling may alter. The reasoning for the analyst’s call is as follows:
McDonald’s stock target price is $246 (down from $275).
Score: Neutral (reiterated; 90-day negative catalyst watch)
Assumed stock price movement For a variety of reasons, almost no Tower makes a short-term bearish recommendation on McDonald’s shares.
With FX and macroeconomic challenges in Europe looming over EPS estimates heading into the third quarter and the winter months, and a valuation (EV/EBITDA near all-time highs vs. the market) leaving little room for shares to absorb negative estimate revisions, “we see an increasingly less favorable risk-reward in McDonald’s shares.”
The decline in Europe’s economy poses a greater risk to McDonald’s “
With less of an offset from employment growth, inflation in major European markets has accelerated and is now eating into discretionary spending power in the low- to mid-double-digit range (as opposed to a mid- to high-single-digit impact in the U.S.).
The U.S. can’t shoulder all the weight for McDonald’s as risks increase with increased energy use and potential knock-on impacts of energy costs as winter approaches. We understand (and concur with) expectations for continued U.S. strength, but we think the U.S. business will need mid-single-digit same-store sales growth in addition to current forecasts to make up for the effects of (1) the strengthening dollar since 2Q earnings and (2) even a low-single-digit decline in combined Europe same-store sales on profit.
According to conversations, investors are sharpening their pencils on both subjects, thus we anticipate that risks will be better priced in: (1) as the 3Q results approach or are released; (2) as attention turns to 2023.”
Featured Image: Megapixl © Alakoo
Author Valerie Remorosa 
