McDonald's Stock Plummets 18%, Valuation Under Scrutiny

McDonald's stock price has declined by 18.1% year-to-date (YTD), raising questions about its valuation. To assess this, let's examine the company's cash flows and earnings.

The fast-food giant has maintained a 50-year track record of dividend increases and recently lifted its quarterly payout again, indicating confidence in future cash flows.

Using the Discounted Cash Flow (DCF) model, we can estimate McDonald's intrinsic value. Over the last 12 months, the company produced approximately $8.2 billion in free cash flow, which is expected to grow through 2028 and then gradually ease.

The DCF model suggests that the estimated intrinsic value of McDonald's stock is broadly in line with its current market price of $248.24.

Two different narratives have emerged from analysts, one suggesting McDonald's is undervalued by 21% due to potential growth in digital commerce and customer frequency, while another argues it may be overvalued by as much as 6% based on simulations.