Why McDonald's Stock Popped Today

Key Points

• McDonald's beat on sales and earnings this morning.

• Profits grew 12% -- 3 times faster than same-store sales growth.

• McDonald's stock costs 25 times this year's earnings, which seems expensive.

• 10 stocks we like better than McDonald's ›

McDonald's (NYSE: MCD) stock is looking golden this afternoon, up a healthy 2.8% through 1 p.m. ET after reporting a modest earnings beat this morning.

Analysts had expected McDonald's to earn $3.15 per share on sales of $6.7 billion, but the company's second-quarter report showed $3.19 per share in adjusted earnings and sales north of $6.8 billion.

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McDonald's Q2 earnings

Global same-store sales grew 3.8% for McDonald's, with relatively greater strength outside the U.S. than within it. Revenue for the restaurateur grew even faster, up 5%, and profits faster still.

Operating income increased 11% and earnings as calculated according to generally accepted accounting principles (GAAP) grew 12% to $3.14 per share. That's not quite as much as the $3.19 adjusted profit, which backed out a nickel's worth of one-time charges. But it's more than 3 times faster than same-store-sales growth, indicating strong improvement in profit margins.

Is McDonald's stock a buy?

Management did not provide guidance for what to expect, sales-wise or earnings-wise, the rest of this year. Analysts who follow the stock, however, are forecasting more modest earnings growth of only 4.5% through the end of this year, and $12.25 per share in GAAP profit by year-end.

Valuation-wise, that works out to a rich 25x multiple on this globe-spanning fast-food restaurant stock. In an expensive stock market where the average S&P 500 stock is selling for more than 29 times earnings, that may sound like a bargain. To me, though, paying 25 times earnings for 4.5% earnings growth and a 2.4% dividend yield seems too expensive to justify.

I wouldn't buy McDonald's stock at this price.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.