Can The McDonald's Rally Continue Into the New Year?

McDonald’s commited $250 million to the diversity of their franchisees

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McDonald's Corp (NYSE:MCD) is the world's leading global foodservice retailer with over 39,000 locations all over the world. Approximately 93% of MCD's restaurants worldwide are owned and operated by independent business owners.

On Wednesday, Dec. 8, McDonald’s Corporation announced a franchisee recruitment initiative to increase the number of franchisees from all backgrounds, including historically underrepresented groups in McDonald’s U.S. and all McDonald’s International Operated Markets. The fast food company will commit $250 million in the U.S. over the next five years to provide alternatives to traditional financing in order to help candidates who may face socio-economic barriers join the McDonald’s System.

The equity has hit a series of record highs this week, including today's surge to $264.77. Early on in the week, the securtiy broke past pressure at the $258 level after staging a sharp bounce off its 80-day moving average in late-November. The $258 level could serve as a level of support moving forward. For the year, MCD is up 23.3%.

mcd chart dec 10

Options traders have rarely been more bullish. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MCD sports a 50-day call/put volume ratio of 2.8, which stands higher than 96% of readings from the past year, meaning long calls are being picked up at a quicker than usual clip.

Fundamentally speaking, McDonald’s has posted a strong recovery after experiencing a 9% decline in revenues and a 22% decrease in net income in fiscal 2020, largely attributed to the pandemic. MCD's revenues have since recovered 17% and its net income has bounced back 54%. However, the company's long-term growth has come at a much slower rate, with its top line growing just 7% since fiscal 2018 and its bottom line increasing 40% since fiscal 2017.

Overall, McDonald’s stock's valuation seems to have run up too high given its current rate of expansion and core fundamentals. Although the fast food company will likely continue its dominance well into the future, a forward price-earnings ratio of 25.97 and a price-sales ratio of 8.75 indicate too rich of a valuation for McDonald's stock at this time.

 

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