A fresh look at McDonald's; Oktoberfest in Munich
1) I have a long history with fast-food giant and American icon McDonald's (MCD)...
As I detailed in my December 31 e-mail, I started buying the stock in late 2002. Then I backed up the truck in early 2003, making it a 10% position in my hedge fund as it tumbled to less than $13. It was the biggest win of my early investing career.
Two years later, the stock had doubled – and it didn't stop there. I ended up riding McDonald's shares up to the mid-$60s over the next five years.
I ultimately sold them during the bear market in 2008, as McDonald's was one of only two stocks in the Dow Jones Industrial Average that rose that year. (Discount retailer Walmart (WMT) was the other.)
What a mistake... I should have "let my winners run" – the key to long-term investment success, as I've written many times.
I kept waiting for the stock to fall so I could get back in, but it never did. It soon went to $100 by late 2011... then $200 by 2019... then $300 by 2024... before finally peaking this March at $341.75.
Fortunately, my predecessor, Porter Stansberry, didn't make my mistake. He recommended MCD in the December 2012 issue of Stansberry's Investment Advisory. And it remains an open recommendation, with the position up 236%.
(Only subscribers can read his full report and buy-up-to advice. If you're not a subscriber, you can become one and immediately access our entire archive, plus receive our best news ideas each month, by clicking here.)
However, since hitting its all-time high, McDonald's has steadily drifted lower. It closed yesterday at $233.04, down 32% from its March peak, as you can see in this chart:
When I last took a quick glance at the stock on June 24, I concluded:
McDonald's is one of the world's greatest businesses, with a global brand and decent growth. It has prodigious free cash flows ("FCF"), which it uses to buy back stock and pay a 2.7% dividend...
The main problem is that the stock isn't cheap. It's currently trading at 20.9 times this year's earnings estimates, only slightly below its 10-year average of 24.1 times.
But that strikes me as fairly valued, especially in light of the headwinds from the rise of GLP-1 weight-loss drugs around the world.
But with the stock down another 14% since then, might it now be an especially good buying opportunity? Let's take a look...
Over the past two decades, revenues have barely moved. But that's mostly because McDonald's has franchised many company-owned units, which reduces capital intensity and boosts profits. As you can see in the chart below, profits have more than doubled:
Franchising has also boosted margins substantially:
FCF, after stagnating for a decade, has almost doubled since 2018:
McDonald's has used its robust FCF to pay a steady and rising dividend (currently 3.3%), buy back stock, and make small acquisitions:
As a result of the buybacks, the number of diluted shares outstanding has fallen by 41% over the past two decades, or 2.1% annually:
Over time, McDonald's acquisitions, dividends, and share repurchases have exceeded FCF – a deficit that the company has funded with rising debt. Net debt today totals $53.8 billion, which is manageable in light of McDonald's steady FCF:
In summary, McDonald's is an excellent business, with high margins and robust FCF. But it's also a very large business, and its size acts as an anchor to growth. That's why revenues and profits have only risen at a low- to mid-single-digit rate in the past few years.
In the past three quarters, global comparable sales went from being up 5.7% in fourth-quarter 2025 to only 3.8% in first-quarter 2026, and most recently to just 1.3% in the second quarter. That's why I view McDonald's as a "slow-growing cash cow"...
I think part of the sales slowdown is due to the fact that roughly 11% of American adults are taking GLP-1 weight-loss drugs. That means more people are eating less or making healthier choices, as this recent New York Times article captures:
Restaurants, from cozy, upscale establishments to national fast-food chains, are figuring out how to adapt menus for the 11 percent of adults, or roughly 30 million Americans, using drugs like Wegovy, Ozempic and Zepbound. People on these medications are eating out less and spending less when they do...
Fast-food chains are facing significant challenges as their calorie-dense foods – burgers and fried foods – are not what people on weight-loss medications are seeking, according to a report by analysts at the investment bank William Blair...
[A restaurateur in Atlanta, Georgia], who is on the weight-loss medications herself, said she saw more diners order only appetizers or share entrees. That has led to a drop of more than 25 percent in the average check size at the restaurant over the last few months.
As for valuation, using yesterday's close price, McDonald's trades at 17.6 times consensus analysts' estimates for next year. That's slightly below its historical average price to earnings (P/E) of 19.7 times over the past quarter century:
In June, I thought that the stock was fairly valued. Today, I think it's moderately undervalued – which is why we continue to hold it in our Investment Advisory portfolio. It's a comfortable hold, but it isn't at the top of my list of where I'd be allocating new money.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. On Saturday night, I flew to Frankfurt, Germany and caught a train to Munich. There, I met up with my friend Veronica, whom I met when I was an intern at the U.S. Embassy in Santiago, Chile during the fall of my senior year at Harvard in 1988. (As an international relations major, I was considering a career in the Foreign Service and was also doing research for my Honors thesis, "Reagan Administration Foreign Policy Toward Chile.")
I've kept in touch with Veronica over the years, and she moved to Munich four years ago, so it was fun to catch up in person. Here's a picture of us from when we first met and one from Sunday, 38 years later (I know, I know – neither of us has aged a day!):
We went to Oktoberfest for the first time, and it was a total madhouse. This year, there were 7.4 million visitors in only 16 days – nearly half a million people per day. And there were lots of families and children, despite it being a beer festival. Here are some pictures (too bad I don't like beer – the mug I'm holding had Coke in it!):
