McDonald's: A Great Company To Hold Long Term, But Currently Too Overvalued

McDonald’s (MCD) is a titan of the fast-food industry, with a global footprint, consistent earnings growth, and a brand that transcends generations. Yet, despite its undeniable strengths, the stock’s current valuation suggests it’s priced for perfection—a risk that could deter investors seeking value. Let’s dissect why McDonald’s is a long-term winner but currently trades at levels that may not justify its premium.

The Case for McDonald’s Long-Term Potential

McDonald’s has built an empire on operational excellence, brand recognition, and strategic innovation. Key strengths include:
- Global Dominance: With over 40,000 locations in 120+ countries, McDonald’s leverages economies of scale and cultural adaptability.
- Consistent Earnings Growth: Analysts project a 8.2% rise in 2025 earnings per share (EPS) to $13.06, up from $12.19 in 2024.
- Resilient Business Model: The company’s franchise-heavy model (93% of locations are franchised) ensures steady cash flow and lower capital risks.

The company’s Enterprise Value (EV) hit a record $273.46 billion as of April 2025, reflecting investor optimism. However, this premium comes with a cost.

The Overvaluation Argument: Valuation Metrics Paint a Cautionary Tale

While McDonald’s fundamentals are solid, its valuation multiples suggest the stock is trading well above historical and peer benchmarks.

1. Elevated EV/EBITDA Ratio

McDonald’s EV-to-EBITDA ratio stood at 17.28 as of May 2024, far exceeding the industry median of 12.22 (Restaurants sector). This metric implies investors are paying a hefty premium for each dollar of the company’s earnings before interest, taxes, depreciation, and amortization.

2. P/E Ratio at a Premium

The stock’s trailing P/E ratio (as of August 2024) was 22.57, near its 10-year average of 25.82. With 2025 EPS estimates at $13.06, even a modest stock price of $300 would push the P/E to 23, slightly above historical norms. However, April 2025 forecasts suggest prices could hit $316.73, implying a P/E of 24.3, further stretching valuations.

3. Zacks’ Overvaluation Warning

The company’s Zacks Value Style Score of F signals it’s overvalued relative to peers. This aligns with its high EV and EV/EBITDA multiples, which suggest limited upside for investors paying today’s prices.

4. Peer Comparison: A Sky-High Valuation

McDonald’s April 2025 EV of $273.46 billion dwarfs competitors like Starbucks ($114.78B) and Yum! Brands ($51.58B). While its scale justifies some premium, the gap is so vast that it raises questions about whether the stock is fairly valued.

Stock Price Forecasts: Highs, But at What Cost?

Analysts predict McDonald’s stock could reach $316.73 by April 2025, a 1.74% return from current prices. However, this assumes no near-term corrections.

Even bullish scenarios highlight risks:
- Overvaluation Risk: A P/E near 24 and EV/EBITDA of 17.28 leave little room for error in earnings growth.
- Interest Rate Sensitivity: High valuations often falter in rising-rate environments, which could pressure the stock.

Conclusion: Hold for the Long Run, but Avoid Now

McDonald’s is undeniably a long-term winner with a fortress balance sheet and global reach. However, its current valuation multiples—particularly EV/EBITDA and P/E—signal overextension. Investors should wait for a pullback to $250–$270, where the P/E drops to 19–21, aligning better with historical averages. Until then, the stock remains a “Hold” for most portfolios.

In the words of Warren Buffett: “Be fearful when others are greedy.” With McDonald’s trading near decade-high valuations, now may not be the time to add exposure.

Final Analysis: McDonald’s (MCD) is a buy-and-hold gem for the long term, but its current premium pricing makes it a risky bet for near-term gains. Investors should prioritize patience and await a correction before diving in.