Despite criticisms regarding comparable sales, McDonald’s Corp (NYSE:MCD) delivered robust results for 2023, maintaining its exceptionally high free cash flow margins at 28.5%. Analysts now suggest that MCD stock could see a 20% increase, potentially reaching $340 per share based on sales estimates for 2024.
Free Cash Flow Margins Remain Robust
McDonald’s reported a 9% increase in Q4 comparable sales globally, with total revenue rising by 10% to $25.493 billion. Notably, the company also disclosed its free cash flow (FCF) for the year, which stood at $7.255 billion, marking a 32.2% surge from the previous year’s $5.488 billion.
This significant increase in cash flow profitability, despite a 10% rise in sales, underscores McDonald’s effective operational leverage. The company’s FCF margin for 2023, at 28.5%, closely mirrors the 28.8% margin observed over the trailing 12 months (TTM), highlighting its consistency in converting sales into cash flow.
Analysts project that McDonald’s will continue converting approximately 25% of its sales into FCF going forward. With forecasted sales of $26.84 billion for the current year, this suggests a potential rise in FCF to $6.7 billion, setting the stage for a reevaluation of its stock value.
Price Target for MCD Stock
Based on the current dividend yield of 2.25%, McDonald’s market capitalization could rise to around $300 billion, indicating a potential $340 per share valuation. A more conservative FCF yield metric of 2.60% suggests a market cap of $258 billion, still representing a 20% increase from its present $215 billion market cap.
Analysts’ price targets further support this optimistic outlook, with an average target of $326.97 per share, reflecting a 14.34% increase from the previous day’s close. Notably, 81% of analysts maintain buy ratings on the stock, underscoring confidence in its future performance.
Generate Additional Income with Short Put Options
Existing shareholders can augment their 2.25% dividend yield by strategically selling out-of-the-money (OTM) put options with near-term expiration dates. For instance, selling the March 1 expiration $270 strike price put option, currently priced at 81 cents, could provide an immediate income boost.
By repeating this trade throughout the year, investors could generate additional income equivalent to 1.2% per quarter, while also potentially acquiring more shares at lower prices if the put options are exercised. This strategy offers a viable means for long-term McDonald’s shareholders to capitalize on the stock’s upside potential while generating extra income.
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