Invest1 publisher2 min readPublished
A 52-week low leaves McDonald's priced at 20 times forward earnings
McDonald's is near a multi-year low and one Seeking Alpha analyst says the valuation is still full. He owns none of it, and his preferred entry sits four turns of forward earnings below where the stock trades.
The Investor · Invest desk
What happened
- McDonald's stock is approaching a multi-year low, and a Seeking Alpha analyst scanning the 52-week lows list stayed neutral on it, citing persistent operational and structural problems.
- He listed competitive pressure, value-seeking consumer behavior and delivery app dynamics as eroding the company's traditional moat, with high interest rates capping the upside.
- At 20 times forward earnings and a 2.95% dividend yield he called the valuation full, and wrote that he would prefer a multiple closer to 16 times before buying.
- His disclosure states no position in any company mentioned and no plan to open one within 72 hours.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- decision A buyer applying the 16x rule is choosing to sit out until either the price falls a fifth or forward earnings grow a quarter, and 0.8% U.S. comps make the earnings path the slow one.
- exposure The shareholder waiting for comps to turn is compensated by a 2.95% yield funded out of earnings already about 59% committed to the dividend.
- constraint One disclosed figure, the 0.8% U.S. comp, carries the whole operational case here; the delivery-app erosion comes with no number attached.
Twenty times forward earnings is what the low costs [4]. The Seeking Alpha contributor behind Ian's Insider Corner wrote that he "would prefer a P/E closer to 16x for a more attractive entry" [5][7]. Sixteen divided by 20 is 0.8, so at unchanged forward earnings his entry is a 20% lower price [1]. The other way to 16 times is forward earnings 25% higher with the price where it is [2]. U.S. comparable sales grew 0.8% in the second quarter [2].
While that plays out, the holder collects 2.95% [4]. Multiply the yield by the multiple and roughly 59 cents of every forward dollar of earnings is already promised to the dividend [3]. The 20% between today's price and the analyst's entry is worth close to seven years of that dividend [4]. A move to 16 times with the payout held would put the yield at about 3.69% [6].
The article gives the forward multiple at today's price, not the one the market paid before the slide [4]. So the argument that this weakness is operational has to lean on the operational figures themselves. That figure is 0.8% growth in U.S. comparable sales, in a quarter where same-store sales and revenue both came in weaker than expected, with execution issues named as a cause [2]. Competitive pressure, value-seeking customers and delivery app dynamics arrive as description, and high interest rates as a cap on the upside [3].
In my view the low is a lower price, and not yet evidence that the operational problem sits in the multiple [4]. The only operational number disclosed, 0.8%, is positive and nearly flat at the same time [2]. The counter-case is the earnings route: if comps re-accelerate, 20 times becomes 16 times with no price concession at all, and the buyer holding out for 16 never owns the shares [2]. His disclosure says he has "no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours" [6].
What to watch
- Third-quarter U.S. comparable sales: growth well above 0.8% reopens the earnings route to a 16x multiple without a price fall.
- Whether the dividend keeps rising against a payout already near 59% of forward earnings.
- Analyst estimate cuts, which would push the forward multiple above 20 times with the share price standing still.