From CNBC · Michael Khouw · · 2m
McDonald's is the new value meal
Trader Mike Khouw says McDonald's stock is cheap even as the chain struggles with its value perception.
In brief
Trader Mike Khouw says McDonald's stock is cheap even as the chain struggles with its value perception. McDonald's shares have improved fundamentally over five years while staying flat in price, making the stock itself a bargain despite customer concerns about menu pricing. Originally reported by CNBC.
Value menu perception crumbles
McDonald's slowest sales growth in over a year prompted a strategy shift. The percentage of U.S. consumers viewing McDonald's as good value dropped from 55% in 2020 to 40% in 2024, according to UBS research.
“A nickel ain't worth a dime anymore”
Low-income shoppers pulling back
Comparable sales rose only 0.8% in Q2 while spending by households earning under $40,000 declined 2.4%, according to transaction firm Numerator. Stories of overpriced value meals at locations like one on I-95 in Connecticut have gone viral.
Dollar menu won't return
McDonald's is preparing a bridge plan with temporary menu items, digital promotions, and loyalty offers instead. A true return to dollar menu pricing is nearly impossible given food and labor inflation over the past 20 years.
Stock price flat, business booming
McDonald's shares are essentially unchanged at $248.50 over five years versus $242.50 five years ago. Yet revenue grew from $23.2 billion to $28.2 billion, net income rose from $7.5 billion to $9.15 billion, and share count fell 5.25%.
Valuation at 10-year low
McDonald's trades at 19.2 times forward earnings, the cheapest in ten years, down from 25 times five years ago. Free cash flow is expected to approach $7.65 billion, giving investors strong cash generation at a discount.
Higher earners still visit
McDonald's isn't dependent only on low-income consumers. Higher-income diners also eat there, and many middle-income customers are trading down from upscale restaurants like Mastro's and Ruth's Chris, where McDonald's scale and digital ecosystem provide advantages.
Options trade structure
With implied volatility at 23.5%, a spread strategy makes sense. Sell a three-month $230 or $235 put and buy a $250-$275 call spread to establish the position near even, betting the stock recovers toward $275 as value initiatives gain traction.
Premium reduction through spreads
Buying a $250 call outright costs $13.50. By selling a $270 call and $230 put simultaneously, the net premium drops to just $2.12, creating a value menu for options traders while accepting the obligation to buy shares below current price.
Here's the gist
McDonald's shares have improved fundamentally over five years while staying flat in price, making the stock itself a bargain despite customer concerns about menu pricing.
