McDonald's Is Stronger Than It Appears

U.S. markets have been trading at or near record highs for some time now, but there’s one blue chip stock that remains more than 10% off the highs it reached this past summer. That stock is McDonald’s and while some might see the drop in price as weakness, others will almost surely call it an opportunity to buy a valuable stock at a discount.

Buying a great company at a great price is the goal of every investor, but those opportunities don’t often come along. Generally the best companies, those that are growing rapidly and generating good profits have stocks that trade at a significant premium.

McDonald’s has seen its shares fall some 12% since reporting disappointing earnings. In fact, McDonald’s has missed earnings expectations in all three quarters of 2019.

These earnings misses are somewhat misleading. Because of a change in non-operating income and expenses McDonald’s has seen its GAAP net income falling, but after-tax profits have been rising. That change is due to the sale of restaurants in 2018 that hasn’t been repeated in 2019.

What this means to the average investor is that reported earnings look to be falling, when in fact profits have actually been rising.

Another sign of the fundamental strength behind McDonald’s core business has been the steady rise in same store sales throughout 2019. So far in the first three quarters of 2019 McDonald’s has growth same store sales by 5.9%, which is an impressive feat given the size and maturity of the business.

Bottom line is McDonald’s is stronger than thought, and shares aren’t reflecting that strength yet.