SUMMARY

Position:                                               LONG

Upside target:                                 $260.00

Reward / risk ratio:                                  2.7

Recommended stop-loss:            $225.50

Recommendation:                         BUY

 

Analysts:

Peet Serfontein, Sithembile Bopela

McDonald’s is a multinational fast-food corporation that franchises and operates fast-food restaurants in the global restaurant industry.  The company’s restaurants serve a variety of value-priced menu products in countries around the world.

The group is in a strong position to further market share growth, via its drive-through business, growing loyalty programme, and innovative products under solid management execution.  The company maintains strong brand loyalty and the global size and scale to support its operations through the trials of the pandemic, while generating a solid financial performance.

Technically, the price looks set to start wave 5 of a 5-wave structure (see insert on the main chart as well as the wave notation 1 to 5).  This pattern emanates from Elliot Wave Theory.  Wave 5 is an impulse wave pattern and denotes a vigorous movement in price that interferes with the primary trend.  The expectation is that the price will progress in the direction of wave 5; our profit target is alongside this price path.

Relative Strength Index (RSI) forward calculations suggest that the share will be in overbought territory around $495, which classifies our profit target of $260 as realistic. We suggest a medium capital at risk allocation for this trade.

McDonald’s is also available as an FNB ETN and is listed on the JSE under the short codes MCETNC (with currency exposure) and MCETNQ (without currency exposure).

 

Technical analysis

The lower panel shows occurrences of Relative Strength Index (RSI) backcross signals indicated by a reading of 1.

An RSI reading of 70 or above indicates that a stock is overbought or overvalued and primed for a pullback; 30 or below indicates the opposite and is known as a backcross.  It often acts as a buy signal, with historic occurrences seeing some upward action following.

The stock remains below its 200-day simple moving average, and the trade idea is regarded as a countertrend trade.

The on-balance volume (OBV) indicator—which uses volume flow to predict stock price changes—is currently moving down, indicating that money is flowing out of the stock.  This remains a concern.  However, downside momentum is forming a trough according to the Coppock curve—an early indication that internal strength is developing.

Our entry range is $227.50 to $237.50 or as close as possible to the current reference price of $232.57.  A fall below this range suggests a structural change in the trend, and provides reason to negate the trade idea.

Our upside target is set at $260 (~11.8% upside potential) which is close to the recent high prices.  Time to exit is end of May 2022 with the option of extending for a longer period.

A fall below $225.50 (~4.3% downside potential) remains a major concern for downside potential and is recommended as a stop-loss.  This level is just below wave 4 of the 5-wave structure.

 

Long-term fundamental view

McDonald’s and its franchisees operate in over 40 000 locations worldwide.  The company also owns and leases real estate in connection with its corporate headquarters and field offices.

Sales have been under pressure over the years, with further downward pressure stemming from the pandemic.  Nonetheless, the group’s performance remains supported by strategic price increases, growth in digital channels, and marketing promotions.

The company delivered a mixed result in 4Q21 as it struggled to meet earnings expectations despite easier y/y com-parisons.  Performance was impacted by staffing shortages, store closures, and supply chain constraints.

Besides ongoing challenges arising from COVID, other downside risks include po-litical unrest, the war in Eastern Europe, and surging commodity prices that have exacerbated supply chain issues and led to higher labour and input costs.  Record inflation is also a particular concern.

Nonetheless, management’s outlook remains positive as the company expects further shareholder returns in dividends and repurchases, as well as planned capex spend to expand its geographic and digital footprint.