Can McDonald’s Stock Gain From Healthy Food Initiatives?

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 32,478 restaurants in 117 countries as of 2009. Of these 26,216 were operated by franchisees and the balance were company-owned. We estimate that franchisee rent & fees accounts for 63% of McDonald’s stock value with franchisee royalties generating 30% of the value and the remainder coming from company-owned restaurants.

We currently maintain a price estimate for McDonald’s stock at $73.58, roughly 6% below current market value.

Increasing its Focus on Healthy Foods

McDonald’s remains the most prominent company in a market whose players are not known for healthy offerings. As domestic focus has increased on obesity and the push for healthier foods, partially due to strong government initiatives, ^[1] McDonald’s has adapted its offerings.  For example, fruits, salads, bottled water and 1% milk are now staples of the McDonald’s menu. McDonald’s is also part of the Council of Better Business Bureaus’ Children’s Food and Advertising Initiative and is continually positioning its product to better appeal to the rapidly expanding health-conscious demographic. ^[2]

Should the company realize greater success in these initiatives, what is the potential upside to its stock value?

Annual customers per restaurant is a key driver of McDonald’s stock value. We currently project annual customers per restaurant to increase from an estimated 674,000 today to nearly 740,000 by 2016 as the economic outlook improves and McDonald’s customizes menu offerings to local tastes in expansion markets.

We note that any success in marketing to health-conscious US consumers would have a limited impact to McDonald’s overall company value as the company generates roughly 65% of revenues overseas. ^[3] Given the significance of this driver to the company’s business, small changes can present material upside or downside. Even a 50 basis point increase in annual growth of customers per restaurant beyond our projections would boost our price estimate by almost 3% assuming we hold the total number of restaurants and profit margins flat.

You can modify the chart above to examine the impact of various trends in annual customers per restaurant on McDonald’s stock value.

However, the upside from these initiatives is by no means a sure thing. In a recent study by Yale’s Rudd Center for Food Policy and Obesity, the McDonald’s Happy Meal offerings did not sufficiently meet nutritional guidelines. Competitors Subway and Burger King were the only quick service restaurants to meet the nutritional requirements of the study, which could indicate that other establishments are better positioned to benefit from the expanding health-conscious demographic.

So while McDonald’s is moving in the right direction with its health-conscious initiatives, work still remains to be done.  If successful, both customers’ diets and shareholders’ returns could be better off in the future.

See our full analysis of McDonald’s here

1. See US Department of Health and Human Services News Release: February 19, 2010 [↩]
2. See Council of Better Business Bureaus Description [↩]
3. See Reuters: McDonald’s U.S. Unit Disappoints but Europe Strong [↩]