There was a time in the United States many years ago when there were virtually no fast-food-style restaurants, but that all changed in the 1950s and 1960s and now countless restaurant brands are serving every imaginable food item. Founded in 1940 by the McDonald’s brothers in San Bernadino California , the brand started to explode after Ray Kroc opened the first McDonald’s restaurant east of the Mississippi River in 1955 in Des Plaines, Illinois. This was after discovering the small restaurant in San Diego in 1954.
McDonald’s Corporation (NYSE: MCD) now reigns as one of the world’s leading food service brands with more than 36,000 restaurants in more than 100 countries. The company is the largest restaurant chain by revenue and serves more than 69 million customers daily. The ubiquitous restaurant chain is truly everywhere and offers something for everybody on a menu that has expanded from burgers and fries to everything from breakfast meals to salads and trendy chicken sandwiches.
For investors, the stock has almost been a dream, consistently going higher in good times, and holding its ground in bad times. The question now, especially after such a long run, is whether the stock is still a good investment. We found six big reasons why investors should perhaps back away from the shares.
McDonald’s stock is expensive
Trading at almost 24 times trailing earnings and 22 times forward earnings estimates is a hefty number for a restaurant. While that is pretty much in line with the overall S&P 500 currently, on a historical basis it’s very expensive, especially for a slow-growth company like McDonalds.
Inflation taking a toll on consumers
While the horrific inflation from the summer of 2022 is behind us, beleaguered consumers are doing what they always do in inflationary times; they are eating more at home. McDonald’s and their competition are dealing with slower restaurant traffic as consumer buying power continues to be hurt by higher prices. According to data from Placer.ai overall restaurant traffic went from a 0.8% drop in July to a massive 4.2% decline in September.
Will new weight loss drugs hurt business?
One of the biggest news items for the fast-food industry recently has been that appetite-suppressing drugs like Olympic and Wegovy are starting to take a toll. With the U.S. adult obesity rate at a stunning 42.4%, a number that has increased 26% since 2008, more and more people are desperately trying to shed pounds, and the cuisine at McDonald’s is not conducive to weight loss.
Millennials are not big fans of McDonald’s
While the boomers and the gen-x crowd that grew up with McDonald’s remain loyal to the Golden Arches, the reality for the company is younger millennials are not big fans of the massive conglomerate. The burger and fries mentality does not blend with the healthier lifestyle that many of the young have adopted, and a large portion of that demographic avoids the franchise.
Price increases are over and that could hurt
For much of this year, the company was able to raise prices, which provided a boost in sales over past quarters. With consumer discretionary spending slowing as inflation, while moderating, is still a huge factor, this could start to affect revenues. McDonald’s CFO even noted earlier this year that as inflation continues to normalize, they expect top-line growth to moderate.
Wall Street still loves the stock
Out of 28 analysts we found covering the shares, 24 are recommending McDonalds as a Buy, 4 are recommending the company as a Hold or Neutral rating, and there are no Sell ratings. While good for stock brokers to recommend the shares to clients, often when analysts are all in on a company and there is no dissenting or negative opinion, that can be a warning sign of a top.
The bottom line is that McDonald’s will likely never end up in the restaurant graveyard, which is littered with scores of companies like Burger Chef, Chi-Chi’s, Arthur Treacher Fish and Chips, and many more. They will likely continue to be a slow-growth company as they cede more and more territory to Chipotle Mexican Grill, Cava and others
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