When it rains, it pours, the old saying goes, and that may be the sentiment among some McDonald’s (NYSE:) shareholders.
The worldwide fast-food leader has seen its stock downgraded three times, by three different analysts, for multiple reasons, in the past week.
On Tuesday, Redburn Atlantic lowered its price target for McDonaldʻs stock from $319 per share to $260 per share, a massive downgrade that would suggest a 13% drop for the stock. They also changed their rating from buy to sell.
A major reason, according to Redburn analysts, is the emergence of glucagon-like peptide-1, or GLP-1, drugs, which are used to lose weight.
Redburn analyst Chris Luyckx said GLP-1s are among “new behavioral challenges,” that are “suppressing appetites and represent an underappreciated longer-term threat.” Luyckx estimated this to be a 1% drag on revenue, or potentially $428 million in revenue, according to Bloomberg.
“A 1% drag today could easily build to 10% or more over time, particularly for brands skewed toward lower-income consumers or group occasions,” the Redburn analyst wrote in a research note, according to Bloomberg.
But that is just one concern.
Pricing Power has Eroded
Redburn also said McDonald’s has lost some of its value proposition due to rising menu prices. The analysts are concerned that it is no longer the low-cost go-to in tough economic times like it has been in the past.
“While the brand has historically benefited from consumer trade-down during periods of pressure, recent years of outsized menu pricing have created value-perception challenges, contributing to persistent traffic softness,” the Redburn analysts wrote, reported Bloomberg.
In the first quarter, McDonald’s same-store sales dropped 3.6% year-over-year, marking its worst quarter since 2020.
Analysts at Morgan Stanley cited similar concerns in lowering its rating to underweight and reducing the price target from $329 per share to $324 per share.
While that still suggests 8% upside, Morgan Stanley analyst Brian Harbour said McDonald’s could be losing its historical status as a defensive play. The chain’s “pricing power has eroded,” Harbour wrote in a research note, according to Barron’s, due to higher prices and the impact of inflation on consumers, particularly among lower-income customers.
He also cited McDonald’s valuation, trading at around 25 times earnings, which makes it less of a value play.
Underwhelming Chicken Strips?
Finally, Loop Capital dropped McDonald’s price target to $315 per share from $346 per share and reduced its rating from buy to hold.
Loop Capital analyst Alton Stump had expected McDonald’s to get a boost from its new McCrispy chicken strips launch in May but has found the product underwhelming.
“We had hoped the superior taste profile of the new chicken strips would overcome the product’s appearance,” Stump wrote in a research note, per Barron’s. “Unfortunately, MCD’s chicken strips have received predominantly negative customer feedback to date.”
Overall, McDonald’s still has a median price target of $340 per share, which would suggest 8% upside. But these factors bear watching, particularly the effects of inflation on the menu items.
As Redburnʻs Luyckx said, per Barron’s: “Unless the brand can reassert its value leadership—either through sharper price-point offerings or renewed menu and format innovation—its historical defensive status may no longer hold.”