MCD is less attractive; slowing sales, inflation, and low EPS growth projections limit forward returns unless multiples expand.

Now, we come to a popular household name. We have McDonald's, stock ticker MCD. And this is another example of a stock, yes, trading right at their 52- week low, down almost 15% in the last year.

But it's not just that. 5-year returns have been very substandard as well.

And what's really interesting is they're now trading at their lowest valuation multiple in the last 5 years for this stock. The average PE multiple has been about 24. They're currently trading at around a 19 PE multiple, historically low for this stock.

So again, we do have to ask ourself, why is that the case? Well, there's a couple of different things that we could point out, but just to start, if we look at the recent earnings report, this will tell a lot of the story.

Global comparable sales increased in the second quarter by just 1.3%. Just 1.3%. That's below the rate of inflation. So, in true purchasing power terms, this actually declined.

In the US, it was up by 0.8%. International operated markets 1.5%. International developmental license markets increased by about 1.9%. Consolidated revenues increased by about 4% but it was only up 2% in constant currency terms. So you can see the issues with this.

Now historically this has also been an incredible dividend grower for the most part. What you'll see is the yields climbing close to 3% and typically they've grown the dividend at a little above 7%.

Now, what you'll notice is McDonald's has an interesting capital allocation strategy because right now their free cash payout ratio is about 71.18%. Which on the surface level seems a little bit higher than a lot of people like to see it, but that's been close to what the average has been over the last decade.

You can see it's been close to that range for about 10 years now. So, this certainly tells us something about what their priorities are in terms of capital allocation.

allocation strategy because right now their free cash payout ratio is about 71.18%. Which on the surface level seems a little bit higher than a lot of people like to see it, but that's been close to what the average has been over the last decade.

You can see it's been close to that range for about 10 years now. So, this certainly tells us something about what their priorities are in terms of capital allocation.

So, what do we know? Well, approximately 95% of McDonald's restaurants are franchised. Now, why is that so important to note? Well, I want to jump over to the profitability to income statement sheet, and you'll see exactly why.

Take a look at McDonald's. There's a story being told here, and I've pointed this out before. Look at how EPS has grown over the last decade, despite the fact revenue dipped and then started to climb again, all while the profit ratio expanded considerably, going from below 40%, 38.5, up to now 57.4. for.

Why is this the case? Well, it's because this was the decade where they shifted to a franchised model. Now, the economics for this are extremely attractive. It makes it a very capital-like business.

Cuz for reference, in 2025, McDonald's revenue for franchise restaurants was about 16.5 billion, while the direct expenses of those was roughly 2.6 billion. The company owned restaurants generated around 9.7 billion, but the direct expenses were 8.3 billion.

So the margins are way better for franchised restaurants.

Well, approximately 95% of McDonald's restaurants are franchised. Now, why is that so important to note? Well, I want to jump over to the profitability to income statement sheet, and you'll see exactly why.

Take a look at McDonald's. There's a story being told here, and I've pointed this out before. Look at how EPS has grown over the last decade, despite the fact revenue dipped and then started to climb again, all while the profit ratio expanded considerably, going from below 40%, 38.5, up to now 57.4. for.

Why is this the case? Well, it's because this was the decade where they shifted to a franchised model. Now, the economics for this are extremely attractive. It makes it a very capital-like business.

Cuz for reference, in 2025, McDonald's revenue for franchise restaurants was about 16.5 billion, while the direct expenses of those was roughly 2.6 billion. The company owned restaurants generated around 9.7 billion, but the direct expenses were 8.3 billion.

So the margins are way better for franchised restaurants.

However, that certainly doesn't alleviate all the issues with the stock right now. Inflation has proven to be a serious threat for this stock as it increases all the cost of their goods sold.

That inflation combined with the fact as we saw global sales have slowed down significantly. All this makes the stock quite a bit less attractive.

So when we talk about forward-looking returns right now for McDonald's, projections are showing EPS kagger of about 6.4 14%. So that's definitely not impressive earnings growth for a stock that historically sit at a PE multiple of 24 to 25, especially considering that as of late, revenue growth has been even slower.

That's the issue with McDonald's. Not just the macro environment, that's the issue with McDonald's. This combined with climbing inflation is not a good recipe.

So again, it's another scenario where even if we apply that 6% earnings growth and the PE multiple stays right where it's at, forward-looking returns aren't that impressive. Basically, to see decent returns with this stock, we need to see a level of multiple expansion over time. The question is, what's going to happen