McDonald’s Shares: Buy, Sell or Hold?

While the broader market has declined since early 2022, McDonald’s (MCD 0.46%) stock sets new highs this year. It’s not hard to see why Wall Street is loving the Golden Arches right now. Sales growth is accelerating, even as consumers reduce spending in other areas. Profitability is also climbing further into record territory.

Let’s take a closer look at the fast food chain’s operational momentum through early 2023 and determine whether the stock is a buy, sell or hold at current valuation.

Tasty trends

McDonald’s has a firm grip on a growing fast food industry. Comparable store sales growth accelerated to a blistering 13% in the core US market and across the broader global sales footprint in the first quarter. That result gave the chain an edge over other high-growth industry peers, including ChipotleAnd Starbucks. Mickey D’s is seeing more customer traffic, but also higher expenses due to rising menu prices.

There were many positive factors driving share growth, but management credits initiatives that have increased customer satisfaction, including better staffing, training and faster order delivery. That’s great news for shareholders, as these gains are more sustainable than, say, increasing traffic from a popular new limited-time menu item.

“Running great restaurants is fundamental to our business momentum,” CEO Chris Kempczinski said in a press release.

Make more profit

The chain pays more for everything from wages to key ingredients, but that pressure is easily offset by growth and price increases. McDonald’s operating margin is approaching 45% of sales compared to the 15% both Chipotle and Starbucks achieved in the first quarter.

MCD operating margin (TTM) data through YCharts

Those colleagues don’t share McDonald’s all-franchise business model, and so their profitability is understandably lower. But Mickey D’s also outperforms more similar peers like Restaurant Brands International, owner of the Burger King and Tim Hortons franchises. This margin expansion is a major factor pushing the chain’s stock to new highs as it points to faster earnings growth ahead. McDonald’s profit rose 19% last quarter after adjusting for currency fluctuations.

Buy, sell or hold?

The biggest risk for investors is paying too much for this high-performing company. McDonald’s shares are valued at more than 9 times annual revenue. That’s a new all-time high for the stock, well above most fast food peers’ valuations. You can own Dominoesfor example, for about 2.5 times sales, while the price-to-sales ratio for Chipotle stock is 6.4.

McDonald’s high valuation still seems riskier given the potential for a recession or slowing economic growth ahead. Yes, the chain is likely to perform well due to a drop in consumer spending; it has in the past. But the stock will have to fall further if markets take another step lower in the coming quarters.

As a result, McDonald’s stock today fits into the wait category. There is no reason for investors to abandon the upbeat attitude that is currently playing out, as evidenced by higher traffic and profitability. Yet Wall Street priced in much of that optimism by sending the stock to nearly $300 per share. Investors should keep this excellent growth stock on their watchlist for the next time market volatility yields a more attractive purchase price.