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Economic fears boost McDonald’s stock

The burger chain’s stock hit record highs, in part because of betting that the chain is recession proof, says RB’s The Bottom Line.
Photograph courtesy of McDonald's Corp.

The Bottom Line

Recessions are good for McDonald’s, or at least they’re not as bad as they are for everybody else.

So think investors, who have been flocking to the burger chain’s stock lately—sending it, once again, to all-time highs.

McDonald’s stock hit $206 per share Friday morning, adding to a series of record highs for the stock in recent years.

McDonald’s stock is up 17% this year. More to the point, it is up 150% since Steve Easterbrook took over as CEO in 2015.

For the most part, investors have bought into what Easterbrook has been selling. The company has generated strong growth in international markets, and though its traffic has been down in the U.S., its same-store sales have easily outperformed competitors as customers pay higher prices and order more add-ons.

Investors also believe that McDonald’s domestic efforts—delivery, self-order kiosks, operational changes to improve speed and menu reductions—will all lift sales in the future. Bank of America Merrill Lynch also reiterated its "Buy" rating on the stock on Friday, giving the company a price target of $220.

Analysts are fairly bullish on the company’s stock—they have a median price target on McDonald’s of $215 a share, according to the financial services site Sentieo, meaning that stock analysts believe it still has considerable room for growth.

At least part of what’s driving McDonald’s stock, however, is a belief that it is something of a safe haven should the economy falter.

There are growing concerns about a potential economic slowdown. Those fears only intensified Friday, after federal data showed a slowdown in hiring and in wage growth.

McDonald’s stock historically performs well in a recession. While other restaurant chains’ stocks have fallen recently, the company’s valuation has held up.

McDonald’s sales tend better than its rivals during a difficult period and that was definitely true during the Great Recession in 2008 and 2009 when customers flocked to the chain’s Dollar Menu. Some customers also “traded down” to the chain’s offerings from more expensive casual dining concepts, at least theoretically.

In addition, franchises tend to be at least somewhat recession proof because the companies are indirectly affected by swings in sales—because franchisees operate the stores and pay royalties based on revenue.

Yet McDonald’s may not be quite as safe this time around as it has been in the past. For one thing, operators have increased prices aggressively in recent years as labor and other costs have risen. While this has helped the chain’s same-store sales, there are many who believe the prices have kept some customers away.

The company has also struggled to find the right solution that would bring in value-oriented customers without hammering its franchisees.

Of course, a lot of other chains have risen prices just as aggressively. And a trade-down scenario potentially benefits quick-service chains of all types. Consumers, after all, still prefer eating out, even if they’d rather do so cheaply.

And for now at least, that sentiment has been good for McDonald’s stock.

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