Morningstar

Menu, Operations Improvements Solidify McDonald's Moat

The company delivered a better than expected third quarter, but investors must be aware that tougher comparisons loom.

Securities In This Article
McDonald's Corp
(MCD)

With the market bracing for soft results in light of sluggish industry trends,

While the third-quarter results reinforce the brand intangible asset behind our wide moat, McDonald's investors must be prepared for U.S. comps to dip into negative territory the next two quarters as it overlaps last year's all-day breakfast launch. That said, we believe there are other drivers that could mitigate these headwinds, including ongoing restaurant-level improvements, the margin benefit of recent refranchising, and the announcement of a new three-year capital return program sometime in the first half of 2017.

We're not planning material changes to our $128 fair value estimate, as the better-than-expected third-quarter results will be offset by a slight reduction to our near-term comp outlook amid limited near-term pricing opportunities. We view shares as undervalued and remain comfortable with our five-year targets calling for 4%-5% annual systemwide sales growth and operating margins in the low 40s (driven by refranchising activity and other operational improvements).

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

Our Top Pick for Investing in US Renewable Energy

Utility-scale solar and battery storage installations are poised to set records in 2024.
Brett Castelli

How to Measure a Stock’s Uncertainty

Morningstar’s Uncertainty Rating helps investors understand the risks associated with an investment and how that may influence a decision to buy.
Emelia Fredlick

How to Determine Whether a Stock Is Cheap, Expensive, or Fairly Valued

The Morningstar Rating for stocks gauges how a stock’s price compares with what our analysts think it’s worth.
Emelia Fredlick

About the Author

R.J. Hottovy

Sector Strategist
More from Author

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.

Sponsor Center