Morningstar

McDonald's Set to Accelerate Top-, Bottom-Line Growth

We plan to raise our $128 fair value estimate and think longer-term investors should keep McDonald's on the radar screen.

Securities In This Article
McDonald's Corp
(MCD)

Now that McDonald's "foundational restoring" 2016 is in the rearview mirror, we turn our attention to several factors that will dictate the strength of the firm's wide moat and form the basis of our investment thesis in the years to come. At the top of these are the implementation of Experience of the Future operational features in the U.S. and other regions, including improved speed of service, greater menu/marketing decisions at the regional level, and adopting consumer-facing technologies, each of which should have a positive impact on guest counts as 2017 progresses and into subsequent years, supporting our five-year average global comp outlook of 3%.

Refranchising plans and SG&A eliminations also reinforce our outlook calling for mid-40s operating margins over the next five years, something that may not be fully priced into market expectations. Finally, backed by expectations of improved comps and a less capital-intensive franchised business model, McDonald's should remain a compelling income play, with the possibility of more than $15 billion returned to shareholders via buybacks and dividends over the next three years.

Based on the timing of refranchising transactions, SG&A cuts, and time value of money adjustments, we plan to raise our $128 fair value estimate by a few dollars. While we'd prefer a wider margin of safety, we think longer-term investors should keep McDonald's on the radar screen due to management improvements, operational enhancements, and a strong cash return profile.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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