McDonald’s has been doing well recently. The stock has been up 5% in the year, beating the benchmark S&P 500. It is just 5% off its all-time high.
However, Morgan Stanley downgraded the stock, saying it can’t sustain its strong performance in the medium term due to economic uncertainties affecting the company’s customer base.
Morgan Stanley’s concerns
The brokerage downgraded the stock from “Overweight” to “Equal-Weight,” signaling a more cautious outlook for the fast-food giant.
It also cut the target price from $329 to $324, indicating a 5% upside from the previous trading day’s close.
One of the primary drivers behind Morgan Stanley’s tempered view is the intensifying competition in the value segment of the fast-food market.
As consumers become more price-sensitive in an inflationary environment, many fast-food chains are vying for market share with aggressive value offerings.
While McDonald’s has historically been a leader in this space, the sheer volume and competitiveness of rival promotions could be eating into its sales and profitability.
Increasing competition and cash-strapped customers
One of the primary drivers behind Morgan Stanley’s tempered view is the intensifying competition in the value segment of the fast-food market.
As consumers become more price-sensitive in an inflationary environment, many fast-food chains are vying for market share with aggressive value offerings.
While McDonald’s has historically been a leader in this space, the sheer volume and competitiveness of rival promotions could be eating into its sales and profitability.
However, the company’s US same-store sales fell by 3.6% in the first quarter, which was its worst drop since the pandemic.
McDonald’s global comparable sales also fell 1% in its first quarter.
The company had offered a $5 meal in the US to spur demand. The company’s executives expect the program to be continued throughout 2025.
While McDonald’s aims to increase its share in the chicken market and plans to test larger burger options and improve its coffee offerings, the effectiveness and widespread adoption of these initiatives remain to be seen.
The fast-food industry is constantly evolving, and the need for consistent and impactful menu innovation is crucial to maintaining consumer interest and driving comparable sales growth.
While McDonald’s remains a strong brand with robust financial health and a history of consistent dividend increases, the immediate outlook suggests a period of more challenging growth.
The market may have already priced in some of these potential shortfalls. Still, Morgan Stanley’s downgrade reflects a belief that the stock’s near-term upside is limited until these headwinds can be more effectively navigated.
Among 25 analysts who have rated the stock in the last 3 months, 13 have given a “buy” rating while 12 have given a “hold” rating.
The consensus target price was $331.70, a 7% upside.
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