The McDonald’s (NYSE: MCD) share price has fallen 16% over the last six months. Normally, that would be unremarkable for a large public company. But a new potential threat has emerged this year and is now at the forefront of some investors’ minds.
I’m talking about GLP-1 weight-loss drugs like Wegovy and Ozempic. They suppress appetite and have proved so popular that Novo Nordisk (the maker of both) is struggling to keep up with demand.
Meanwhile, rival Eli Lilly is expecting US regulatory approval for its own weight-loss drug, Mounjaro, by the end of the year. Research suggests Mounjaro could be even more effective!
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So, should McDonald’s shareholders (like myself) be worried about this potential threat? Here’s my take.
GLP-1 weight-loss drugs
First, I should note a difference here. Ozempic is a drug used in the treatment of type 2 diabetes, but it also results in weight loss. Wegovy, on the other hand, is specifically designed for chronic weight management and is prescribed for that purpose.
Nevertheless, they share the same active ingredient — semaglutide. And this mimics the action of a hormone called GLP-1, which is released after eating and slows down the movement of food in the gut.
This results in fewer cravings and a fuller feeling for longer. And most patients then tend to eat less high-sugar and high-fat food.
So the potential threat is clear. If more people are less hungry, will they still turn impulsively into a McDonald’s drive-through or order in a delivery?
Food for thought
Research from Morgan Stanley estimates that 24m people in the US — around 7% of the population — will be using these drugs by 2035.
The UK ranks among Europe’s most overweight countries, so I’d imagine demand will be strong here too.
However, I’m not sure about emerging economies, where the cost of taking these medicines could be a limiting factor.
Besides, 2035 is years away, with many things still unknown at this point. For example, GLP-1 medications have already been linked to serious intestinal side effects. Perhaps some patients will shun the treatment altogether.
Or could there be reduced demand for some kinds of food (salty fries) but increased demand for others? McDonald’s could change its menu options to adapt, as it has in the past.
Also, I doubt most kids will be prescribed these drugs, so I’d imagine some parents will still find themselves in McDonald’s pretty regularly.
My move
Now, despite its recent fall, the stock is still trading on a price-to-earnings (P/E) ratio of 23. That’s hardly dirt cheap for a mature restaurant/consumer cyclical stock.
However, it’s debatable whether McDonald’s really is that. It owns the buildings run by franchisees and collects rent and royalties. These provide a steady source of non-cyclical income, which has helped the firm double its dividend over the last decade.
Of course, this is irrelevant if fewer people are going to visit its restaurants in future. But I think the risk of this might be overblown, at least in the immediate-to-near term. And I’m wary of making assumptions about long-term changes to consumer habits.
Still, the share price could come under more pressure in the coming months. And the stock does arguably now carry a bit more risk. But certainly not enough for me to panic and sell my holding.
