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Fast Food Stocks Receive a Boost from McDonald’s Profits

Key Points
McDonald’s had a strong third quarter and is a favorable investment option for fast food investors.
The report indicates strength in all markets and channels, which is positive news for the industry.
McDonald’s is the leading fast food company, trading at a price-to-earnings ratio of 22X and offering a competitive yield.
Here are five stocks that we believe are better investment options than McDonald’s.
Restaurant stocks experienced a setback during the summer, but the situation has improved. Results from McDonald’s (NYSE: MCD) and Chipotle Mexican Grill (NYSE: CMG) show that consumer spending remains solid, and companies with strong brands, digital capabilities, and focus on execution can deliver results for investors.
The key takeaway is that several competitive fast food companies will report their results in the coming weeks and are expected to show similar performance. McDonald’s is a leader in the fast food industry and provides a promising opportunity for dividend-growth investors.
McDonald’s achieves solid results across different regions and segments
McDonald’s had a successful quarter, with strong performance in all regions and segments. The company achieved 14% top-line growth, generating $6.69 billion in revenue, which is 200 basis points higher than expected. The company’s top-line growth also surpassed Chipotle’s 11% growth due to its exposure to international markets.
McDonald’s experienced 8.3% growth in developing markets and 10.5% growth in developed markets, which is positive news for other companies like Wendy’s (NASDAQ: WEN), which aims to expand internationally, and Arcos Dorados (NYSE: ARCO), McDonald’s Latin American franchisee.
In the core US market, McDonald’s achieved 8.1% growth, driven by digital initiatives, marketing efforts, and price leverage. Jack in the Box (NASDAQ: JACK) and Restaurant Brands International (NYSE: QSR) may also benefit from this strength as they have been focusing on expanding domestically in North America. In terms of digital sales, it accounts for 40% of McDonald’s net sales in the top-9 markets, aligning with Chipotle’s 36.6% digital contribution. Another US operator that stands out for its digital performance is Jack in the Box, which will report its earnings in mid-November. Analysts have set low expectations for Jack in the Box, anticipating a decline compared to previous periods.
McDonald’s also showed strength in terms of earnings, with adjusted earnings of $3.19 per share. This result exceeded expectations by $0.20 per share, a difference of 670 basis points, and represents nearly a 20% increase compared to the previous year.
The company’s strength can be attributed to revenue leverage and operational quality, which are expected to continue. Although McDonald’s did not provide specific guidance in its press release, the CEO’s commentary was positive. Mr. Kempczinski stated that the company’s performance is in line with their expectations and that they are in a strong position.
McDonald’s increases dividend; analysts forecast a 25% upside
McDonald’s offers a healthy dividend and is an attractive option for income growth investors. The stock currently yields approximately 2.55%, and the company authorized a 10% increase in dividends during the third quarter. The payout ratio is around 54% of earnings, ensuring a balanced approach. McDonald’s is on track to become a Dividend King in the next few years, with annual increases expected to continue.
One downside is the stock’s high price-to-earnings ratio of 22X, which may be a deterrent for some investors. However, the stability offered by McDonald’s can offset this.
Wendy’s offers the highest yield among fast food stocks at 5%, trading at a price-to-earnings ratio of 19X. However, the dividend is considered risky. Wendy’s management expressed confidence in the company’s strategy with the latest dividend increase and expects earnings growth to follow.
Technical outlook: McDonald’s shows a trending signal
McDonald’s stock price surged 3% in pre-market trading following the release of the third-quarter results. This upward movement is benefiting other fast food stocks and confirms support at the 24-month uptrend line, which aligns with the long-term upward trend. Over the past four years, this specific Exponential Moving Average (EMA) has consistently produced upward bounces, indicating that a significant rally in share prices may occur.
Both the Moving Average Convergence Divergence (MACD) and the stochastic oscillator align with this upward movement, suggesting the potential for a significant shift in momentum, with ample room for further price appreciation. If the stock reaches the analysts’ consensus target, it could result in a 25% increase and push the market to a new all-time high.
Before considering McDonald’s, here’s something you need to know. MarketBeat monitors the recommendations of top-rated and most successful research analysts on Wall Street and the stocks they advise their clients to purchase. While McDonald’s currently has a “Moderate Buy” rating among analysts, these top-rated analysts believe that there are five other stocks that would be better investments. View the five recommended stocks by clicking the link below. We will also provide you with MarketBeat’s guide to investing in electric vehicle technologies (EV) and the most promising EV stocks.

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