McDonald's stock rises to a record, brushing off investor worries about sales

By Tomi Kilgore

Concerns about decelerating same-store sales may be overdone, as Wells Fargo believes sales trends improved throughout the fourth quarter

McDonald's Corp.'s stock rallied toward a record close Friday, its first in seven months, dismissing Wall Street concerns over declining sales and traffic in an uncertain macroeconomic environment.

Wells Fargo's Zachary Fadem said that after recent conversations with investors, he sees rising fears that the fast-food chain will miss fourth-quarter same-store sales expectations amid growing tensions in the Middle East and an increased promotional environment in the quick-service restaurant industry.

Investors are "more cautious," he wrote in a note to clients Thursday, that year-over-year growth in same-store sales - or sales of restaurants open more than a year - will decelerate given the strength seen last year, and that the prospects for traffic growth in 2024 will be negative.

But on the bright side, Fadem said his research suggests that "trends improved throughout [the fourth quarter]." And considering the mixed investor sentiment and reasonable valuation based on historical price-to-earnings ratios, he said, "we like the setup from here" for the stock.

The stock (MCD) climbed 2.2% in afternoon trading toward its first-ever close above $300. The current record close is $298.41, reached on June 30, 2023.

The company is expected to report fourth-quarter results in early February. The FactSet consensus for same-store sales is for growth of 5%, down from growth of 8.8% in the third quarter and 11.7% in the second quarter, and less than half the 12.6% growth seen a year ago.

Despite this deceleration, McDonald's has beaten same-stores sales expectations in the past 11 quarters, and in 17 of the past 20 quarters.

Fadem is also upbeat about growth in the number of restaurants of 4% to 5% "for the first time in recent memory." He believes Wall Street is overlooking the long-term boost to McDonald's results from this growth given the "significant investments" the company has made in the past decade to improve the productivity of new stores.

He believes the return on investment on new units hasn't been as favorable as it is now in more than 10 years.

While McDonald's stock was rising toward a record, shares of Restaurant Brands International Inc. (QSR), which owns rival quick-service chains Burger King and Popeyes Louisiana Kitchen, inched up 0.1% on Friday, but they have pulled back 2.3% since closing at a record $78.63 on Jan. 10.

And rival Jack in the Box Inc.'s stock (JACK) rose 1.8% on Friday but was 36.3% below its record close of $122.64, reached on May 10, 2021.

Meanwhile, the Dow Jones Industrial Average DJIA, of which McDonald's stock is a component, ran up 407 points, or 1.1%, toward a record close Friday.

-Tomi Kilgore

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01-19-24 1523ET

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