McDonald's stock falls: no longer cheap, no longer immune to inflation

Why McDonald's is no longer the defensive haven it once was

Walking into a McDonald's is no longer as cheap as it used to be. The menu keeps rising, customers check the price and, along the way, discover that mustard is in short supply. The anecdote, half-jokingly, sums up what is happening to the company on the stock market: a business that for decades sold cheap and weathered every crisis has stopped being the haven it once was. Its CEO blames the stock correction on inflationary pressures. The market, by contrast, points to something more uncomfortable than a simple uptick in prices.

The 20% of sales vanishing in the U.S.

The figure that matters most is not in the press release but in the business. In the U.S., the company has lost 20% of its sales volume. It's not just that prices are rising and traffic is holding up: customers are falling away. Sticky inflation has become the silent enemy: it makes inputs more expensive, dampens eating out and forces costs onto customers who no longer forgive price hikes. With just enough money to make it to the end of the month, eating out is the first thing to be cut.

Why McDonald's no longer works as a defensive stock

Defensive stocks suffer when rates soar. With 10-year bonds at their highest since before the great financial crisis, a dividend of just over 3% moves to the back burner: investors would rather have a coupon without surprises than take on the stock's volatility. And if, as is priced in, at least two more rate hikes arrive in the coming months, pressure on the sector will only increase. The dividend argument is losing force just when it was needed most.

Families walking away and appetite-suppressing pills

There is a front almost no one anticipated. The story coming out of the U.S. holds that McDonald's has gone from being the weekend outing for kids to a place families flee. Add to that the effect of trendy weight-loss drugs such as Ozempic, which are hammering the fast-food business. Calorie-heavy menus clash with customers who now inject themselves to lose weight, and some chains have had to redesign their menus for the post-double-chin era. Some are already suggesting rotating portfolios out of junk food and into pharmaceutical companies like Eli Lilly.

Is now a good time to buy McDonald's stock?

Valuation is the million-dollar question. The stock trades at a P/E near 20 times earnings, below its historical average of 22 to 25 times, which some read as a discount. But it is not the kind of stock bought at 10 or 12 times earnings: that is what is expected in sectors like energy, pharmaceuticals or banking, with higher dividends and less cyclical exposure. With a dividend yield around 3,5%, the picture changes depending on what rates do. On the downside is the investment in the NEXT project, which is expected to bear fruit but with no deadline.

The final paradox: despite everything, the stock trades about 100 dollars above where it was a decade ago. A business that seemed unbeatable now has to prove it still is. And for now, the mustard is not coming back.