McDonalds (NYSE:MCD) really doesn’t need an introduction. It is the world’s largest and most famous restaurant chain. It may well benefit from high inflation if the GFC is any guide. But is it just a ‘safe haven’ and is there any more growth left in it? We think there is.
Who is McDonalds?
McDonalds traces its origins back to the 1950s, founded by the McDonalds brothers who ended up selling it to Ray Kroc who took it to the next level.
It has 40,000 restaurants worldwide that employ 2.2m people as employees or franchisees and serve 65m people each day. Australia is the fourth largest market after the US, UK and France by revenue. It accounts for roughly a thousand stores and just over 100,000 employees – it is the largest youth employer in the country.
There are many things that make it unique including its franchising model that have led many to say it is really a real estate company than a fast food company.
You see, its franchisees pay not just royalties on sales but rent for running ‘their’ business on a property – not to mention a whopping US$1.5m upfront charge that must be financed with the franchisees own money (yes, their own – not borrowed funds). And they have to deal with all the front-line issues that they’ll have to face being a franchisee.
But while it is hard work for the franchisees, it is easy for head office. McDonalds tends to buy cheap land that will inevitably grow over a 20-year period during which their franchisees are contracted with them.
And it sets up its stores with a plain, simple and consistent layout meaning minimal upfront costs for them.
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Having a good year and half-decade
In the last 5 years McDonalds has grown systemwide sales by $22bn and revenue by $2bn. Free cash flow conversion is 89% and its Operating margin 44.8% vs 43.1% 5 years ago.
McDonalds’ shares are up 85% in the last 5 years and up over 10% in the last 12 months and are at an all-time high. The S&P500 has only gained 62% in 5 years.
Current CEO Chris Kempczinski is a big believer in the following quote from Ray Kroc: ‘either you’re green and you’re growing or you are ripe and you are rotting’. So, McDonalds is planning for a big future, both short and long-term.
For 2023, it has not given formal revenue and profit guidance, but has given some important metrics. It expects:
- SG&A expenses to be 2.2-2.3% of systemwide sales,
- A 45% operating margin,
- A 10-12% hike in interest expense
- 20-22% effective income tax rate
- $2.2-$2.4bn in capex, half of which will be to new restaurant expansion, and;
- FCF conversion rate over 90%.
Consensus estimates, derived from a grand total of 34 analysts, call for US$25.1bn per share (up 8%), $13.4bn in EBITDA (up 24%) and US$10.93 EPS per share (up 31%).
The company’s June quarter results were impressive with EPS coming in 14% better than consensus estimates. It had successfully passed price increases to its customers and demand remained solid.
Looking to the longer-term
McDonalds has 100 new restaurants in the pipeline in Australia alone, one third of which will be in regional areas. There is inevitably a far larger pipeline when the rest of the world is taken into account.
For 2024, consensus estimates call for $26.8bn in revenue (up 7%), $14.5bn in EBITDA (up 8%) and $12.19 EPS (up 12%). The target price is U$318.22 from 34 analysts.
The stock is trading at 17.9x EV/EBITDA and 23.93x P/E, a slight premium to the average S&P500, but perhaps you get what you pay for here. By 2030, McDonalds is expected to have $33.3bn in revenue and $18.9bn in EBITDA, both of which are nearly double to 2022.
We think McDonalds is worth US$337.07 using a blended DCF/relative valuation. Our DCF valuation is $326.11, using consensus estimates and a WACC of 7.4%.
Our relative valuation is $348.04 per share, using a 28.1x FY24 P/E – the average of its peers, including Chipotle, Starbucks, Dominos, Restaurant Brands and Yum. The current share price is just 23.8x P/E for FY24.
So, even though shares are at an all time high, we think there is growth left in this business.
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