Has McDonald's Recent Run and Digital Push Stretched Its Valuation?

• If you are wondering whether McDonald's is still worth buying at these levels or if the golden arches are starting to look a bit pricey, you are not alone.
• The stock recently closed around $314.5 and has notched gains of 1.2% over the last week, 2.4% over the past month, and 7.5% year to date, adding to a solid 66.4% return over 5 years.
• Recent headlines have focused on McDonald's strategic push into more digital and delivery driven sales, along with ongoing menu innovation aimed at sustaining traffic and pricing power. At the same time, investors have been watching management's global expansion plans and brand refresh initiatives as potential drivers of long term growth and resilience.
• On our framework, McDonald's scores a 2/6 valuation score, which suggests it looks undervalued on a couple of metrics but not across the board. Below, we break down what that means using different valuation approaches, before introducing an even more intuitive way to think about its true value.

McDonald's scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: McDonald's Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a company is worth by projecting the cash it can generate in the future and then discounting those cash flows back to today's $ value.

For McDonald's, the latest twelve month Free Cash Flow is about $7.8 Billion. Analysts, combined with Simply Wall St extrapolations, see this rising steadily over the next decade. For example, projected Free Cash Flow for 2035 is roughly $14.4 Billion, implying healthy but gradually slowing growth as the business matures.

Using a 2 stage Free Cash Flow to Equity model, these future $ cash flows are discounted back to today, producing an estimated fair value of about $259.25 per share. With the stock recently trading around $314.50, the DCF suggests McDonald's is roughly 21.3% overvalued from this cash flow based perspective.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests McDonald's may be overvalued by 21.3%. Discover 908 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for McDonald's.

Approach 2: McDonald's Price vs Earnings

For consistently profitable companies like McDonald's, the Price to Earnings (PE) ratio is a practical way to gauge what investors are willing to pay for each dollar of current earnings. It captures not only today's profitability, but also how optimistic the market is about future growth and how much risk it perceives in those earnings.

In simple terms, faster expected growth and lower perceived risk usually justify a higher, or more expensive, PE ratio, while slower growth or higher uncertainty call for a lower, or cheaper, multiple. McDonald's currently trades on a PE of about 26.6x. That is above the broader Hospitality industry average of around 24.1x, but well below the 56.4x average multiple commanded by its closest peers, which include higher growth and more volatile names.

Simply Wall St's Fair Ratio framework estimates that, given McDonald's growth profile, margins, scale, industry and risk factors, a more appropriate PE would be closer to 30.7x. This company specific Fair Ratio is more informative than simple peer or industry comparisons because it adjusts for how McDonald's actually earns and grows its profits, rather than assuming all Hospitality stocks deserve the same multiple. Since the Fair Ratio sits above the current 26.6x, this lens points to the stock being modestly undervalued on an earnings basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1457 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your McDonald's Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which are simple stories that capture your view of McDonald’s future, link that story to specific assumptions for revenue, earnings and margins, and then translate those into a Fair Value you can easily compare with today’s share price to inform whether you prefer a buy, hold or sell stance.

On Simply Wall St’s Community page, used by millions of investors, Narratives make this process accessible by turning your perspective into a living forecast that automatically refreshes when new data, such as earnings updates or major news, comes in. This helps your Fair Value stay aligned with reality rather than becoming a one off calculation.

For McDonald’s, one investor might build a bullish Narrative around rapid international expansion, digital scale and margin gains that point to a Fair Value of about 373 dollars. Another, more cautious investor could focus on pressured low income traffic, rising costs and competition to arrive at a Narrative closer to 260 dollars. Both can clearly see how those different stories drive different numbers and potential decisions.

Do you think there's more to the story for McDonald's? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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