Expect McDonald’s Corporation (NYSE:MCD) stock to become stale soon, according to Citi analyst Jon Tower. Here are Tower’s comments that also saw him lower the price target from $275 to $246.
We see increasingly less favourable risk-reward in McDonald’s shares, with FX and macroeconomic challenges in Europe looming over EPS estimates….
In his investors’ note, he pointed out that McDonald’s valuation remains close to all-time highs. That’s because McDonald’s sales have been very solid in the first half of the year. Tower now warns that the high valuation leaves little room for the stock to absorb downward revisions on estimates.
Troubled valuation or recession risks?
It is easier to see why the Citi analyst made the comments. McDonald’s trades at a PEG ratio of 3.02 in the stock market. Compared to the industry’s PEG of 1.83, the stock would be overvalued. But we know MCD has been strong amid the high valuation. Perhaps, the power of pricing gave the company bulletproof when inflation ran hot. But how can they continue doing it during a recession?
Citi says the growing recession in Europe will heighten the risk for McDonald’s. A hit on spending power will push consumers into cheaper foods hurting McDonald’s sales. Owing to these facts, the twin risks of valuation and recession are a bear trigger for MCD. To an extent, the stock is reacting.
On the daily chart, MCD lost important support at $253. The stock losses in the past month stand at 5.13%. Clearly, at the oversold level, MCD is on a free fall. The potential support zone for the stock remains at $233.
Should you buy MacDonald’s
Aside from the report by Citi, McDonald’s lacks an upside potential. The next support lies at $233, implying further downside potential. The stock is a sell.
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