While the fast-food giant performs well during economic upturns, it also manages well during economic downturns.
Given the uncertainty of the future, investing involves weighing the pros and cons of different investments. Safety is usually the priority for conservative investors. Right now, McDonald’s stock looks like a solid investment.
It doesn’t matter whether the economy is up or down, McDonald’s business is likely to thrive. Despite both bull and bear market conditions, McDonald’s stock tends to perform well for investors.
Several factors contribute to McDonald’s stock’s performance during a bull market, but this report focuses on three.
What’s On the Happy Meal?
Investment mistakes are common, but nobody likes to commit them. Do not feel remorse for what you did. Embrace it as part of your learning process. Considering the consequences of making the wrong decision is the smartest thing you can do.
Investors may be more likely to invest aggressively if they anticipate a bull market. You would probably make more moderate decisions if you knew the bear market could continue.
A middle-of-the-road option, it is an interesting option. The company operates fast-food restaurants all over the world.
If 2023’s recession turns out to be false, more people may eat out, which will boost the restaurant chain’s sales. An upturn in the market is also implied by the absence of a recession. As people trade down to cheaper eating options during a recession, McDonald’s could see strong demand at its lower cost point.
To put that into perspective, McDonald’s was faced with material inflation headwinds in 2022 and had to raise its prices. The restaurant industry has been experiencing this for some time. However, McDonald’s estimates that it gained market share in key product categories while prices were rising.
In addition, McDonald’s reported a 5% increase in comparable guest counts globally. Although an economic downturn would likely result in a lingering bear market, it seems likely that the company would do better than its competitors based on its recent performance in a challenging business environment.
Accordingly, McDonald’s tends to have less downside risk to its business if you are wrong about a bull market (which is often triggered by an economic upturn).
If an economic expansion occurs, how will it affect the economy? This would likely result in even stronger financial results for McDonald’s. There will be a significant number of people eating out.
Even people with sophisticated palates will buy fast food from McDonald’s, regardless of whether they like the company or not. It’s true that some customers will upgrade to higher quality food, but others will come to take their place. No matter where you go to McDonald’s, you know what you’re liable to get. Even those who trade up are unlikely to completely give up McDonald’s speed, convenience, and food consistency.
In other words, you win (or at least protect yourself from the downside) if you’re right and you lose if you’re wrong. Considering the current uncertain state of the world, that’s a smart move.
In terms of financial debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), McDonald’s has a reasonable ratio of 3.3 times. A ratio of times-interest-earned measures how much interest has been earned over a 12-month period. Furthermore, it has a strong balance sheet that is investment-grade. When you’re in a challenging environment, having a strong financial foundation is obvious, but it’s also a positive thing when you’re in a healthy one.
There is no doubt that McDonald’s isn’t sitting still, adjusting as the economy fluctuates. There are plans in place. Capital expenditures in 2023 are expected to range from $2.2 billion to $2.4 billion.
Most of the money will be used to open 1,900 new restaurants (mostly franchises). This is spending that the company can take on regardless of business or stock market conditions.
It will also lead to long-term revenue and earnings growth, which means McDonald’s will either grow in a bull market or get stronger in a bear market so that it will be stronger in the next bull market. Long-term investors will benefit from the firm’s solid foundation, regardless of how it’s structured.
Anything Else for That Order?
A bull market could arrive just as easily as a bear market could last. Predicting the future is a fool’s errand.
As a result of today’s uncertain environment, investors should err on the side of caution. In McDonald’s business model, you can place an order if you expect an upturn, but you’re also aware that you may be off on the timing.
The most suitable play-it-safe choice could be firm with a strong financial foundation and a solid customer base in both up and down economies.