An American brand I’d still buy shares in

There’s talk that a smaller UK rival is eating into this multinational firm’s profits, but overseas investing expert Rodney Hobson isn’t worried. He also issues an update on Crowdstrike stock.

14th August 2024 08:03

by Rodney Hobson from interactive investor

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It was rather a shock to read a newspaper report suggesting that food outlet Greggs (LSE:GRG) could start eating into the fast food market domination of McDonald's Corp (NYSE:MCD), even if only in the UK. However, investors do need to consider whether the Big Mac is starting to shrink after decades of seemingly unstoppable growth.

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McDonald’s has reported a weaker second quarter, as problems in several countries were exacerbated by a deteriorating environment for consumer goods in the United States home market, where more than 40% of sales are made. The US economy has held up so well since Covid that we have rather taken for granted that it will continue to do so.

Total revenue slipped only a fraction of 1% to just under $6.5 billion, but analysts had expected a modest increase. Net profit dropped sharply by 12% to just over $2 billion.

Comparable sales in the US fell 0.7% due to lower customer numbers, partly offset by higher average sales per order. Up to this point, McDonald’s had been remarkably successful in passing on price rises to compensate for inflation in the cost of ingredients. Hopefully, with inflation easing it will not be necessary to raise prices further in the immediate future.

McDonald’s now has different problems to tackle. Sales in France fell markedly for no obvious reason and China was weak, too. More importantly, the Middle East conflicts are having a serious impact, with some customers boycotting the chain because of its heavy presence in Israel.

Of the 40,000 locations that the chain operates in more than 100 countries, 5% are in the Middle East. McDonald’s has bought out its Israeli franchises after the local franchisees offered discounts to Israeli military personnel but the damage, as far as neighbouring Arab nations are concerned, has been done.

All this follows the impact of withdrawing from Russia after the invasion of Ukraine.

Undaunted, McDonald’s is this year splashing out $2.7 billion on capital expenditure, mainly on opening new restaurants, including 1,000 more in China despite political tensions with the West. It has in the past shown itself as the clear leader in fast food, rolling out new products and handling price rises skilfully so as not to deter customers. It is now coming under increased pressure in various local markets from the likes of Greggs, which seems to have learnt lessons from the rapid spread of McDonald’s and is now applying them more effectively.

McDonald’s shares hit $300 in January but have been on the slide since, slipping as low as $245 last month ahead of the latest figures. They do seem to have bottomed out, though, having found support around $260 or just below several times.

Source: interactive investor. Past performance is not a guide to future performance.

At the current $270, the price/earnings ratio looks a bit too high at 23.5, even for a company of this quality, given the uncertainty about earnings over the rest of this year, but the yield is some consolation at 2.4%.

Hobson’s choice: I recommended McDonald’s shares at $244 in May 2022 and since then shareholders have enjoyed a small rise in the share price and an increased dividend. I suggested in November that $300 could be broken but that hope will have to be deferred until trading picks up. Nevertheless, and despite the competition, I still rate the shares a buy.

For the record, I own shares in Greggs.

Update: It takes nerves of steel to buy into AI chipmaker CrowdStrike Holdings Inc Class A (NASDAQ:CRWD), but the shares do seem to have bottomed out after the international computer outage last month. I suggested buying at the end of July when the shares were $233 and was a little premature. The bottom came a day or two later at $217 but they are now back above $240. This is a highly volatile stock, but my buy recommendation still stands. Just be ready to get out sharpish if there is any more bad news.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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