McDonald’s Sales Momentum into January Could Prompt Stock Upside

McDonald’s (NYSE:MCD) competes with Wendy’s (NYSE:WEN), Burger King, and Yum! Brands (NYSE:YUM) in the fast food market and is the market leader with about 19% share. The company also competes with Starbucks (NASDAQ:SBUX) in the specialty coffee market.

McDonald’s owns and franchises restaurants across the globe with over 32,000 restaurants in 117 countries. Of these, roughly 80% were operated by franchisees, with the balance being company-owned. We estimate that franchisee rent & fees accounts for 62% of McDonald’s stock value with franchisee royalties generating an additional 29%. The remaining 9% comes from company-owned restaurants.

We currently maintain a $78.40 price estimate for McDonald’s stock, slightly ahead of market price.

Q4 Results from McDonald’s and Competitors

McDonald’s released its Q4 results last month, stating that its global comparable store sales increased by 5% as compared to the same quarter last year. The comparable store sales in the U.S. increased by 4.4%, largely due to customer-focused initiatives to enhance product offerings. ^[1].

Yum brands, which operates KFC and Pizza Hut, saw same-store sales for Q4 2010 increase by 5% compared to the same period last year. ^[2]

Wendy’s saw North American same store sales increase by 0.2% in Q4 compared to the same period last year. ^[3]

Looking at these Q4 results in aggregate, what stands out is the comparable strength recorded by McDonald’s and Yum Brands, while competitor Wendy’s lagged well behind their year-over-year (YOY) comps.

McDonald’s Continues Momentum in January

McDonald’s reported continued strength in January, with U.S. comparable store sales rising 3.1% YOY for the month. ^[4] The ability to sustain strong sales growth is key for companies like McDonald’s, particularly in the face of rising commodity costs that are likely to persist through 2011. We’ve previously assessed the affect of rising input costs on McDonald’s and the necessity for the company to maintain sales growth (see: Can McDonald’s Product Evolution Offset Rising Input Costs?).

See our full analysis and $78.40 price estimate for McDonald’s

McDonald’s encouraging comparable store sales performance has been driven by both increased average spend per customer visit as well as a rise in customer traffic at its restaurants. We project a roughly 1.3% compound annual growth rate (CAGR) for average spend per customer visit at McDonald’s stores through our forecast period. To illustrate the sensitivity of McDonald’s equity value to this metric, we estimate that a 2.0% CAGR (vs. our 1.3% base case estimate) would imply a 3-4% upside to our $78.40 price estimate.

Our forecast for sustained growth is largely driven by expected economic improvement as well as the introduction of new products. McDonald’s has seen recent success from strategic adaptation of product offerings as well as operations. For example, the company has increased its healthy food offerings to attract health-conscious consumers and added on-the-go type meals for consumers eating at non-conventional hours, in addition to keeping many of its restaurants operating 24/7 to cater to these customers. ^[5]

Drag the trend line in the interactive chart above to see the affect of various average spend per customer visit scenarios on McDonald’s stock value.

1. Press Release: McDonald’s Delivers Another Year of Strong Results in 2010 [↩]
2. Yum! Brands Inc. Announces 4Q and Full Year Results [↩]
3. Wendy’s/Arby’s profit beats as Arby’s improves [↩]
4. McDonald’s January Global Comparable Sales Rise 5.3% [↩]
5. The Wall Street Journal: On McDonald’s Menu: Variety, Caution, Dec 27 2010 [↩]