VALUATION HIGHLIGHTS

1. International Operated Markets constitute 49% of the Trefis price estimate for McDonald's's stock.
2. U.S. constitutes 48% of the Trefis price estimate for McDonald's's stock.

WHAT HAS CHANGED?

MCD Tops Q3 Estimates

McDonald's posted adjusted earnings per share of $3.23 for the quarter, just above the analyst estimate of $3.20. Revenue rose 3% year-over-year (y-o-y) to $6.87 billion, slightly above the consensus estimate of $6.82 billion. Global comparable sales decreased 1.5%, with the U.S. market showing a modest 0.3% increase. The International Operated Markets segment saw a 2.1% decline, while the International Developmental Licensed Markets segment dropped 3.5%, primarily due to the impact of the war in the Middle East and negative comparable sales in China.

Note:McDonald's FY'23 ended on December 31, 2023. Q3 FY'24 refers to the quarter that ended on September 30, 2024.

Outlook

McDonald's management didn't offer specific guidance for Q3. In the report, management highlighted ongoing digital integration and innovation as core strategies. Investors should monitor same-store sales growth closely, particularly in international markets. Future quarters will likely hinge on the effective execution of digital strategies and menu innovation to counterbalance market challenges and enhance customer engagement.

E. coli Outbreak linked to McDonald's

The Q3 earnings report comes after the stock was hit by the outbreak of E. Coli linked to McDonald’s burgers. According to CDC, the outbreak has spread to 13 states and infected 75 people.

“The true number of sick people in this outbreak is likely much higher than the number reported, and the outbreak may not be limited to the states with known illnesses,” the CDC said. “Of 61 people with information available, 22 have been hospitalized, and 2 people developed hemolytic uremic syndrome, a serious condition that can cause kidney failure.”

On a positive note, McDonald's management said during the earnings call that the outbreak will not have a material impact on business.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of McDonald's value that present opportunities for upside or downside to the current Trefis price estimate:

Average Revenue Per U.S. Restaurant: Historically, the Average Revenue per restaurant (both company-owned and franchised) has increased, and as the company focuses on a combination of value and gourmet products, revenue per restaurant is likely to increase with the higher ticket price. Further increasing guest count with higher comparable sales is likely to drive this metric further over our forecast period.

Number of franchise restaurants in high-growth markets: McDonald's is working towards a goal of being a 95% franchised entity and growth in the number of franchised restaurants is improving profitability. Further, as the company expands and adds more restaurants, systemwide sales are likely to grow.

BUSINESS SUMMARY

The company franchises and operates McDonald’s restaurants, which serve a locally relevant menu of quality food and beverages in communities across more than 100 countries. Of the 41,822 McDonald's restaurants at year-end 2023, approximately 95% were franchised.

McDonald's essentially offers a uniform menu, though with minor variations to suit the local taste. A typical McDonald's menu includes burgers, sandwiches, salads, snacks, breakfast sandwiches (McMuffins), beverages (soft drinks, coffee, milkshakes, juices), and desserts (ice cream, pies, smoothies).

McDonald's competes primarily with Wendy's and Burger King in the hamburger fast food category. It competes with Starbucks through McCafe.

SOURCES OF VALUE

McDonald's classifies its operations into the following three segments:

1. U.S.
2. International Operated Markets
3. International Developmental Licensed Markets and Corporate

KEY TRENDS

McCafe gives McDonald's a strong presence in the specialty coffee segment

McCafe represents McDonald's foray into the high-margin caffeinated beverages market dominated by premium coffee chain Starbucks. McDonald's has been able to keep the prices competitive and margins healthy due to its excellent store network, marketing muscle, and highly efficient supply chain. McCafe's menu has been extended to more than coffee and now includes fruit smoothies, mocha, and chocolate shakes.

Competition among the top fast-food chains to intensify in the breakfast segment

The breakfast market is proving to be a profitable segment, especially in the U.S. McDonald's is the dominant player in the breakfast segment with a market share of over 40%. McDonald's ensures new items are added to the breakfast menu regularly. However, it now faces serious competition as a number of rivals such as Dunkin' Brands, Restaurant Brands International, Taco Bell, and Starbucks have stepped up their game in the breakfast segment. Starbucks is in the process of reinvigorating its breakfast menu with the help of baked goodies launched under the La Boulange brand. Restaurant Brands International houses two well-renowned brands: Burger King and Tim Hortons, both of which already have a strong presence in the breakfast market. Dunkin' Donuts has also revamped its breakfast menu to cater to the needs of its customers.

Store Redesign, Value Meals To Drive Growth

McDonald's is in the process of converting its stores into "Experience Of The Future" restaurants, providing technological convenience to its customers. The company's focus on balancing its innovative gourmet offerings to attract millennials with its value focus to retain existing customers is likely to drive growth in the future.