McDonald's Corp (Ticker: MCD) - Brief Breakdown Revisited
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
McDonald’s Corporation operates and franchises McDonald’s restaurants globally. It is the largest fast food chain and largest restaurant chain by revenue, serving over 69 million customers daily in over 100 countries across 39,198 outlets as of the end of 2020. McDonald’s is known globally and sponsors many big events such as the Olympics. McDonald’s raised its prices on its famous Big Mac, Chicken McNuggets and other food items, helping them offset the sharp rises in food and labor costs. This move gave McDonald’s its highest revenue since 2016. Although there is no shortage of competitors in the fast food industry, McDonald’s is the largest and most well known chain globally, controlling ~21% of the market. There is a recent push for cooking and eating healthier, which has hurt McDonald’s up until this past quarter. However, if household expenses continue rising (e.g., rent, mortgages, taxes, etc.), people will likely seek out cheaper alternatives for food, and McDonald’s might be at the top of that list. The McDonald’s brand is powerful and it will continually be known as the king of fast food, whether or not that will hold weight in the future, time will tell.
Quantitative Analysis
At the time of this writing (7/4/2022), MCD is trading at $252.96 with a 52 week range of $217.68 - $271.15 and a market cap of $187.08B. In Q1 of 2022 McDonald’s saw global comparable sales increase by 12% and Digital Systemwide sales exceeded $5 billion, representing 30% of the total Systemwide sales. Return of equity (ROE: Net Income / Total Equity *100) of MCD is -128.88% and net margin (net income / revenue) is 29.93%. The price to earnings (price per share / earnings per share) ratio was 26.71 and the debt to equities ratio (total liabilities / total equity) is -9.49. This financial analysis was done using financialstockdata.com (sign up using our promo code GCI to get the first month of the premium tool FREE here). You can view MCD’s Q1 2022 earnings here and their 2021 Annual Report here.
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Bullish Thesis
Here are three points to support the bullish thesis:
Market dominance in a thriving industry: The global fast food industry continues to grow, and McDonalds continues to dominate in market share. According to market research by T4, the size of the global fast food industry grew from $540B in 2016 to $636B in 2020 (a 17.8% increase). The same analysis projects that the industry will grow by an additional $55B by the end of 2022. For the 12 months ending in March of 2021, fast-food chains took in 70.2% of dollars spent eating out and 82.9% of all restaurant traffic, according to data from The NPD Group. In this thriving industry, McDonalds reigns supreme, claiming 21.4% of global fast food market share. If McDonalds can continue its market dominance, it seems like a no-brainer for investors in the fast food space (*not financial advice). This point still holds true and I believe that it will continue to dominate because of the footprint and the price dominance compared to mom and pop shops.
Automated order taking: In 2019 McDonalds acquired technology firm Apprente and rebranded it to McD Tech Labs to “advance employee and customer facing innovations.” In October of last year McDonalds announced that they would be selling McD Tech Labs to IBM as part of a larger, more strategic partnership with the iconic technology giant. With the help of IBM, McDonalds plans to create and scale out better automated order taking (AOT) technologies - including improved mobile app UI/UX and in-person technologies in dining rooms and drive-thrus. According to CEO Chris Kempczinski, "That work is beyond the scale of our core competencies, if you will. And so I think in this case, IBM is a natural partner for us." These technologies not only have the potential to improve customer experience (e.g., more convenient ordering, faster food delivery, etc.), but could also help cut down on operating expenses (e.g., lower labor costs). As shown in the quantitative analysis, online ordering is increasing at a rapid pace and a solid part of McDonald’s business. I’ll look for this trend to continue as McDonald’s will be able to become more efficient with sales.
McDelivery: McDonalds, like many other businesses, was forced to improve their delivery services over the last two years as economic policies and changes in consumer behavior kept foot traffic in their dining rooms low. Since 2016, McDonalds has expanded their delivery footprint from just 3,000 restaurants to more than 32,000 restaurants across 100 countries. Their “McDelivery” program still relies on third party delivery operators like DoorDash and Uber Eats, whose service fees can eat into profits. However, McDonalds expects that the size of their consumer base could be used as leverage in negotiating better rates with these delivery services. In a Q3 call last year, they said "we have an ability to drive traffic to (3rd-party delivery) apps that we think is second to none, and that should be reflected in the rates that we're paying," adding that “this is yet another example of where our scale confers upon us competitive advantages.” Delivery is increasing as projected and there will always be space for the delivery of fast food. If McDonald’s can make app and delivery continue to grow, I do not see how in this growing digital world they cannot thrive.
Bearish Thesis
Here are three points to support the bearish thesis:
Post-Pandemic Healthy Trend: More and more people globally have become more aware of their health and one of the first areas many try to improve is their diet. McDonald’s has the perception of being unhealthy and very bad for you, so many will cut fast food out in general. The fast food industry has grown, but not at the pace of inflation. This past quarter was the highest revenue since 2016, but it came after increasing prices on their menu. The healthy trend will be something to watch going forward to see if it affects McDonald’s as it has in previous quarters outside of Q1 of 2021. I believe this point is decreasing because McDonald’s is offering more of healthy options. People realize the health effects of fast food and would eat at McDonald’s anyway. I think people care more about their pockets than their health so as everything is increasing in price people will gravitate to the cheaper option.
Increased Costs to Operate: There has been an increase in gas, labor, food, supplies, and everything needed to operate the business have risen by 14% in one quarter. That increase is astronomical. In order to combat these increases, McDonald’s responded by increasing prices across their menu. This helped get McDonald’s revenue back up to 2016 type numbers, but at the end of the day will the price increases be sustainable if McDonald’s prices get closer to more “Mom and Pop” type of prices? My inclination is no. This is true but with the growing digital footprint of McDonald’s, this increase cost will be cut. More digital registers and app orders will give less of a need for cashiers.
Staff Shortages: There has been a big push by the current administration to show the increase of jobs, but it seems like more and more people want higher paying jobs that are remote and not in the restaurant or service industry. From my personal experiences, I see restaurants and grocery stores all over my city and in cities I travel too there’s a lot of “Now Hiring” signs at front and open tables with a wait because of staff shortages. This will hurt the business going forward if they cannot hire to keep up with the demand for the food. This is increasing and increasing badly. I believe no one really wants to work in this space and less people are willing to work at a place like McDonald’s without a lot more pay. McDonald’s is finding ways to automate so in the end I believe they will be fine but in the short term there will be a struggle.
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Brandon
Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.