McDonald's Mixed Results Weigh on Valuation

McDonald's Corporation, MCD, is currently trading at a lower valuation following recent share weakness. However, its operating picture remains mixed, with softer U.S. traffic and persistent cost pressure offsetting some of the discount.

The stock's forward earnings multiple sits close to its five-year low and below major comparison benchmarks. This discount is largely due to MCD trading at 21.57X forward 12-month earnings, only modestly above its five-year low of 21.17X.

McDonald's second-quarter adjusted earnings were $3.38 per share, up 6% year over year and 1.8% above the Zacks Consensus Estimate of $3.32. However, revenues rose only 4% to $7.10 billion, missing the consensus mark of $7.14 billion by 0.5%. Franchised restaurant margins increased 4.3% to $3.71 billion and represented roughly 90% of total restaurant margin dollars.

U.S. comparable sales increased 0.8% in the second quarter, driven by positive average check growth, but this was offset by lower comparable guest counts. The result points to limited traffic momentum despite positive sales. Management estimated that value execution issues caused about two-thirds of the second-quarter traffic shortfall versus expectations.