On 29 April McDonald’s will release its first quarter earnings and if analysts are right, the numbers will be good.

Earnings of about $1.80 per share is predicted, based on Refinitiv forecast data, which would smash the same period in 2020 where it reported $1.47 per share and put the burger giant back on its pre-pandemic track.

Like restaurants everywhere, McDonald’s was happy to see the back of 2020 as Covid-19 ripped across the world and saw us all at home for months at a time. McDonald’s saw revenue decline 9% in 2020 to $19.2 billion, while earnings per share fell to $6.35 from $7.95 in 2019.

Despite this setback, as an investment McDonald’s did remarkably well last year. The share price ended 2020 at nearly the same level as just before the pandemic broke, at around $215.

With most of the world now in reopening mode and people rediscovering the freedom to get out and about, see friends and family, visit shops and leisure outlets and so on, investors can begin to look ahead with far more confidence. McDonald’s is a prime beneficiary of greater movement of people as it is a popular choice for ‘food on the go’.

Analysts at US broker Trefis forecast McDonald’s revenues to grow by around 11% to $21.2 billion in 2021. They said: ‘Net income is likely to grow to $5.5 billion as recovery post Covid-19 gains pace, increasing its earnings per share to $7.48.’

ANALYSTS ARE LOVIN’ IT

The Trefis analysts err on the cautious side with their calculations. The consensus earnings per share estimate for this year is $8.43, rising to $9.30 for 2022 and $10.26 for 2023, according to Refinitiv. Interestingly, of the 39 analysts that follow McDonald’s, 30 rate the stock as a buy, 10 with very high conviction. Not one single analyst calls the stock a sell.

The potential for increasing market share is a key reason why analysts are bullish. Thousands of restaurants have been forced to close their doors since the onset of the pandemic, and many of them will never reopen.

Their loss is McDonald’s opportunity. With its powerful and pervasive global brand and infrastructure, McDonald’s could become stronger as the weaker players pull out of the market.

It has more than 38,000 restaurants in 120 countries worldwide and it is said in some marketing circles that the chain’s ‘Golden Arches’ are more widely recognised than the Christian cross.

Last year Forbes ranked McDonald’s as the tenth most valuable corporate brand in the world, worth $46.1 billion, and the fourth most prized non-technology business. McDonald’s owns and runs around 2,600 outlets itself. The remainder are franchises, where the company licences its operating model to franchisees in a profit share arrangement.

In recent years restaurants have been refitted, brightened up and dragged into the 21st Century, with free customer wi-fi, phone charging points, self-order kiosks and curb-side pick-up through mobile app ordering. 

McDonald’s has been providing home delivery in many markets for some time through deals with Uber Eats and Just Eat Takeaway (JET) in the UK. It is also testing meat-alternative products, which could bolster its social cachet with healthier-eating and ecology-mindful millennials, one of the chain’s longer-run challenges, according to critics.

It is also embracing technology and data analytics to improve efficiency and customer experience while lowering running costs, such as automated, multi-language robotics ordering.

GROWTH AND INCOME

While there is a long-run growth story, income seekers will also be pleased. The company has an unbroken 40-year-plus record for growing its dividend stretching back to 1976, even during Covid, where it increased the 2020 dividend by 6.5% to $5.04. A $5.25 per share award is expected this year.

That’s not a huge income yield, about 2.3%, but it knocks the socks off the 0.625% on five-year UK government bonds or 0.75% from five-year US government bonds. The income stream also looks very secure, with the payout ratio returning to fairly typical 60% levels after inflating to 80% last year. The dividend itself has more than doubled over the past decade.

Measured versus its peer group McDonald’s stands on an enterprise value to earnings before interest, tax, depreciation and amortisation, or EV/EBITDA, of 18.2 versus the average of 17.3; a price to cash flow of 20.1 against its industry average of 13.9; and the peer group’s dividend yield of 1.15%. Yet McDonald’s price to earnings ratio of 26.5 is just an 8% premium, based on a next 12-months basis. That’s not excessive, in our view.

McDonald’s shares aren’t going to be a multi-bagger, but the stock could make good gains through 2021 as reopening continues. Beyond this year, the shares should continue to offer the sort of sleep-easy steady progress year after year that helps built wealth through solid capital gains and ever-increasing dividends.

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