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McDonalds Research Report 2.20.2024

Ticker: MCD
Sector: Consumer Cyclical
Industry: Restaurant
Headquartered: Illinois, USA
Moat: Wide – Intangible Asset- Brand, Positioning, Cost advantages

Action at date of this post

Accumulate as of 2.20.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying. If you do not own it but are looking to buy this is an indication to open a position of no more than 25% of your intended, total position.


McDonalds Corporate Overview

McDonald’s Corporation, founded in 1955 by Ray Kroc, has evolved into one of the world’s leading fast-food chains, symbolizing the globalization of American-style fast food. Renowned for its iconic Golden Arches and the universally recognized character of Ronald McDonald, the company has become a cultural phenomenon. McDonald’s success lies in its ability to deliver consistent and affordable food offerings, with a menu that caters to diverse tastes across the globe. The company’s signature items, such as the Big Mac and Chicken McNuggets, have achieved widespread popularity, contributing to its enduring global appeal.

With an extensive network of over 40,000 restaurants spanning more than 100 countries, McDonald’s has established a formidable global presence. The company’s international expansion has been marked by its adaptability to local tastes and cultural nuances, offering region-specific menu items alongside its globally recognized classics. McDonald’s has not only contributed to the standardization of fast-food experiences but has also played a significant role in shaping the global fast-food industry. The company’s ability to adapt to diverse markets while maintaining a consistent brand identity has allowed it to thrive on a global scale, making it a ubiquitous and influential force in the world of fast food.


McDonalds Segment Analysis

McDonald’s operates in three segments – US Market (~ 55% of stores), International Operated Markets (~ 20% of stores) and International Developmental Licensees & Corporate (~25% of stores). The below info graphics are from the 2023 Investor Update fact sheet.


McDonalds Moat Source

McDonalds wide moat stems formats brand that is known for quick, inexpensive, quality fast food. Along the way the depth of the moat has been dug with lower operating costs due to size and scale. As well, the companies size has allowed it to make the shift to digitizing its business to meet the consumer wherever they are.


McDonalds Growth Outlook

CEO Chris Kempczinski took the helm of the company in 2019 and has done a stellar job ushering the company into the competitive, digital age for restaurants. The company has rallied around operating under three pillars with the acronym MCD – Marketing, Core, Digital, Delivery, Drive Thru. On the marketing front the company has rolled out adult value meals, celebrity meals and a relaunch of some old mascots like Hamburgerler and Grimace. 

The Core focus refers to staying committed to 10 core menu items that drive 70% of all sales system wide. This is exciting as it keeps the company focused on a small number of its own sub-brands like BigMac, McNuggets, and Egg McMuffin. Staying focused on sales generators is key to efficiency for the brand. In a company where volume matters, efficiency matters. To show just how successful McDonalds is at launching sub brands – chicken items are almost equal to beef sales. 

The most exciting and growth driving initiative is the D3 (Digital, Delivery, Drive Thru). At the time of writing, digital (mobile) sales are ~40% of all sales. McDonalds has invested a lot of money into its digital architecture. The return on the investment was tested IRL when COVID hit and has been refined. Digital has allowed the company to reduce head count, shrink store footprints and speed up orders. With over 150 million loyalty rewards members, the company has a wonderful source of data on a huge number of customers which gives menu insights. In addition, as labor costs rise (and fast in places like California) the company can defray costs with technology it has already refined..

McDonalds is one of the few S&P Dividend Aristocrats, which are companies that have grown their dividend for 25 years or more. You can be certain that the company takes great pride in this fact. The company has a strong balance sheet that more than supports its dividend, stock repurchases and capex. The company’s borrowing has created a negative ROE but I look past this to the efficiency of capital allocation and strong free cash flow. 

At the time of writing the company did disclose impact to its operation in the Middle East due to the Israel – Hamas war. While not a huge percent of the company’s total sales it is meaningful to impact the numbers. It’s likely that the worst is baked in for the company as the negative impact will remain so long as the war goes on.


McDonalds By The Numbers

trong gross and net margin has helped the company convert a good slug of its revenue into cash. ROCE and ROIC are not huge numbers but are solid and consistent. The company has many levers to pull to impact its numbers from refranchising stores, to refining its digital architecture. The high debt numbers are manageable and the funds have been used to its benefit in retiring shares, dividends and consistent capex.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing, the author holds a position in McDonalds.

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