Looking at the company's recent Q3 results and its share valuation, it's hard not to get the impression that investors could choose it as a cure for worsening times. At a time when the main S&P 500 index (US500) has fallen by more than 16% since its January highs, the fast food giant's valuation has risen by 5%. We decided to see if the average American would switch to a BigMac in times of crisis?
The company's financial position
Overall year-to-date revenues, despite experiencing a 5% year-on-year decline in Q3, are up 9% year-on-year. According to CEO Chris Kempczinski: "As the macroeconomic landscape continues to evolve and uncertainties persist, we are operating from a position of competitive strength. I also want to thank our franchisees, who have done a tremendous job navigating this environment, while providing great value to our customers."
Source: Conotoxia MT5, McDonalds, Weekly
Revenue volumes may have been positively impacted by price increases across the sector. The company seems to have done quite well in passing on costs to customers, as we saw in, for example, the price of a cheeseburger in California, which increased by 50%, from US$0.99 to US$1.48. This was the first price increase for this sandwich in 14 years.
Earnings per share fell by 6.29% year-on-year, which the company explained by rising costs in the Eurozone caused mainly by energy prices. However, we learned from the report that: "comparable sales in the US increased by more than 6% during Q3, marking the ninth consecutive quarter of comparable sales growth in the segment".
Currently, the company's price-to-earnings P/E ratio is 34, which may indicate signs of overvaluation. However, if analysts' expectations for future earnings are taken into account, the P/E ratio is 26.2, and this could give potential for further share price increases. The company has also announced another dividend increase.
Will Americans eat at McDonald's in times of crisis?
According to an analysis by NUMBEO, a company that measures the cost of living in various places around the world, the price of lunch in low-cost restaurants fluctuates between US$10-30 (average US$16). The same spread for an average McMeal set at McDonald's, depending on the state, ranges from US$7 to US$12 (average US$8.5), indicating a meal at the popular fast food outlet is twice as cheap. The question may immediately arise, will Americans decide to cook at home? However, this seems unlikely due to the fact that, according to Statista, as many as 82% of the country's citizens live in cities, where eating out is much more popular. In addition, preparing a meal at home does not seem to be cheap enough to compete with eating at fast food outlets.
Therefore, we could surmise that even if the income of the average American worsens, it would be difficult to give up eating out cheaply. Alternatively, the portions ordered may be smaller and thus cheaper, but this could be to everyone's advantage. After all, according to the 2017-2020 National Health and Nutrition Examination Survey, 41.9% of adults nationally (USA) are struggling with obesity.
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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