Business

McDonald’s Stock: King Of Fast Food Is Here To Stay (NYSE:MCD)


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In this evaluation of McDonald’s Corp. (NYSE:MCD), we examined its company-operated retailer progress because it plans to broaden its retailer rely this yr. We in contrast it with its franchise shops when it comes to income and margins. Then, we projected its firm retailer gross sales primarily based on its deliberate enlargement and historic income per retailer progress.

Moreover, we regarded into McDonald’s franchise enterprise when it comes to its income contribution and franchise retailer progress. We analyzed the benefit of opening a McDonald’s franchise to a franchisee when it comes to the common revenue per retailer and in contrast it towards rivals to help our progress forecast of its franchisee enterprise primarily based on its historic retailer and income.

Lastly, we examined the corporate’s place within the international fast-food market when it comes to its market share. We in contrast it with its rivals when it comes to its branding measured by its retailer places and followers. Then, we projected their retailer progress and income per retailer progress to undertaking the market share of the corporate and its rivals.

The Shift from Company-Operated Stores

Based on its annual report, McDonald’s operated 40,031 complete shops worldwide. Its shops are segmented into franchise shops and company-operated shops. In the previous 10 years, its company-operated shops had been in decline whereas its franchise shops grew. In complete, McDonald’s shops over the interval had flattish progress. However, its company-operated shops had constructive progress in 2020 and 2021.

McDonald’s Store Count

2013

2014

2015

2016

2017

2018

2019

2020

2021

Average

Franchise Stores

28,691

29,544

30,081

31,230

34,108

35,085

36,059

36,521

37,295

Growth %

2.9%

3.0%

1.8%

3.8%

9.2%

2.9%

2.8%

1.3%

2.1%

3.3%

Company Operated

6738

6714

6444

5669

3133

2770

2636

2677

2736

Growth %

2.1%

-0.4%

-4.0%

-12.0%

-44.7%

-11.6%

-4.8%

1.6%

2.2%

-6.9%

Total Stores

35,429

36,258

36,525

36,899

37,241

37,855

38,695

39,198

40,031

Growth %

2.8%

2.3%

0.7%

1.0%

0.9%

1.6%

2.2%

1.3%

2.1%

1.7%

Source: McDonald’s

The firm’s administration had additionally beforehand introduced plans to shut extra shops in future years, corresponding to over 100 shops in Walmart (WMT) places with low quantity as the corporate focuses on on-line supply and drive-thru. To forecast its company-operated phase, we first forecasted its retailer rely primarily based on a 10-year progress charge. Then, we factored in its income per retailer which we assumed to develop at its 10-year progress charge to derive our complete company-operated gross sales forecast.

Company Operated Stores Segment Forecast

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

Company Operated Store Count

2636

2677

2,736

2,547

2,371

2,207

2,054

1,912

Growth %

-4.8%

1.6%

2.2%

-6.9%

-6.9%

-6.9%

-6.9%

-6.9%

Company-operated Revenue per retailer

3,573,596

3,040,717

3,577,266

3,706,599

3,840,608

3,979,461

4,123,335

4,272,411

Growth %

-1.1%

-14.9%

17.6%

3.6%

3.6%

3.6%

3.6%

3.6%

Company-operated Revenue ($ bln)

9.42

8.14

9.79

9.44

9.10

8.78

8.47

8.17

Growth %

-5.9%

-13.6%

20.2%

-3.5%

-3.5%

-3.5%

-3.5%

-3.5%

Source: McDonald’s, Khaveen Investments

Based on McDonald’s annual studies, we calculated a number of metrics primarily based on retailer progress, income, and margins to check the distinction between its franchise shops and company-operated shops.

Store Comparison

Franchise Stores

Company Operated

Store Count

37,295

2,736

Average 10-year Store Growth

3.3%

-6.9%

Revenue Per Store

$350,851

$3,577,266

Gross Profit Per Store

$288,242

$635,965

Average 10-year Revenue Per Store Growth

3.7%

-2.3%

Average 10-year Revenue Growth

7.2%

-5.1%

Gross Margins

82.2%

17.8%

Source: McDonald’s, Khaveen Investments

From the desk above, we see that whereas McDonald’s franchise shops have a better retailer rely, its company-operated shops deliver in additional revenues to the corporate per retailer at almost 10 instances higher than franchise shops as the corporate collected franchising charges from its franchisees. Although its company-operated retailer rely had declined on common, its income per retailer elevated over the interval greater than its franchise shops. Despite that, its income progress previously 10 years from company-operated shops contracted which contrasts with its franchise retailer complete income progress. In phrases of profitability, franchise shops earn the corporate a considerably greater margin than company-operated shops.

Based on its annual report, moreover delivering nice buyer experiences, the corporate additionally believes franchising is essential in driving its profitability. This is obvious as the corporate’s margins had been rising because it closed down its much less worthwhile company-operated shops and expanded its franchise enterprise.

MCD earnings and margins

McDonald’s, Khaveen Investments

Overall, as the corporate expanded its extra worthwhile franchising enterprise and closed down its company-operated shops with decrease margins, the rise of its profitability over the previous 10 years demonstrates the corporate’s success in bettering its profitability. We anticipate its margins to proceed rising because it expands its franchising enterprise sooner than its company-operated shops.

Franchise Business Expansion

McDonald’s depends upon its franchising enterprise as 93% of its shops worldwide are franchised companies in accordance with its annual report. To establish the attractiveness of McDonald’s franchises, we in contrast the corporate’s franchise towards rivals when it comes to common income, value, revenue, preliminary charges and common 5-year franchise retailer rely progress.

Franchise Comparison

Average Franchise Store Revenue ($ mln)

Average Franchise Cost ($ mln)

Average Franchise Profit per retailer ($ mln)

Margin %

Average Franchise Fee ($ mln)

Franchise Store Growth % (5-year)

McDonald’s

2.70

2.55

0.15

5.6%

1.39

3.3%

KFC

0.98

0.86

0.12

12.2%

2.11

6.4%

Burger King

1.35

1.18

0.18

13.0%

1.87

3.6%

Subway*

0.42

0.39

0.03

7.3%

0.32

-3.4%

Domino’s (DPZ)

0.98

0.84

0.14

14.3%

0.38

6.3%

Pizza Hut

0.71

0.61

0.10

14.0%

1.22

2.5%

Papa Johns (PZZA)

0.78

0.71

0.07

8.6%

0.39

3.2%

Taco Bell

1.50

1.34

0.16

10.7%

1.97

4.4%

Wendy’s (WEN)

1.20

1.13

0.07

5.5%

2.79

1.0%

Average

1.16

1.04

0.12

10.6%

1.38

3.0%

*3-year common

Source: Franchise Direct, Business Insider, Vetted Biz, ICSID, Khaveen Investments

Based on the desk above, McDonald’s franchisees have the best common income amongst rivals which highlights their sturdy skill to generate gross sales. However, operations of the franchise have excessive prices in comparison with rivals because it has the bottom margins. On the opposite hand, franchises corresponding to Wendy’s have the best margins regardless of being beneath common when it comes to gross sales. This is adopted by Pizza Hut (Yum Brands) (YUM) and Burger King (Restaurant Brands International) (QSR). However, in accordance with Franchise Direct, when it comes to preliminary charges, a number of rivals corresponding to KFC, Burger King, Taco Bell and Wendy’s have greater charges than McDonald’s which we consider highlights a possible barrier for franchise homeowners and probably benefitting the corporate to construct up shops. That mentioned, different corporations even have decrease preliminary charges and better margins than McDonald’s that are Subway, Domino’s, Pizza Hut and Papa John’s. In phrases of previous 5-year retailer progress, KFC had the best progress adopted by Domino’s, whereas McDonald’s had greater than common progress.

We projected the expansion of its franchise enterprise additionally primarily based on retailer rely progress and income per retailer progress at a 10-year historic progress charge to acquire our complete franchised eating places income progress forecast.

McDonald’s Franchise Business

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

Franchise Stores

36,059

36,521

37,295

38,516

39,778

41,080

42,426

43,815

Growth %

2.8%

1.3%

2.1%

3.3%

3.3%

3.3%

3.3%

3.3%

Franchised eating places income per retailer

323,359

293,804

350,851

354,779

358,752

362,768

366,830

370,937

Growth %

3.0%

-9.1%

19.4%

1.1%

1.1%

1.1%

1.1%

1.1%

Franchised eating places income ($ bln)

11.66

10.73

13.085

13.66

14.27

14.90

15.56

16.25

Growth %

5.9%

-8.0%

21.9%

4.4%

4.4%

4.4%

4.4%

4.4%

Source: McDonald’s, Khaveen Investments

All in all, franchise shops are essential for the corporate’s enterprise because it accounts for 93% of its complete shops. When evaluating it to different franchises, though it has the best common income per retailer, its margins are compressed resulting from excessive working prices which may hinder its competitiveness. However, its preliminary charges are decrease than a number of rivals which reduces the barrier for franchise homeowners to open a McDonald’s retailer. That mentioned, we see competitors being robust as a number of rivals together with Subway, Domino’s, Pizza Hut and Papa John’s not solely have decrease preliminary charges but in addition greater margins.

Stagnant Market Share as Competition Heats Up

fast food market share

Company Data, Khaveen Investments

Companies

Market Share (2021)

Past 10-year Revenue Growth %

McDonald’s

43.8%

-1.5%

Yum Brands (Including Yum China)

30.9%

2.2%

Restaurant Brands International

10.8%

26.6%

Domino’s Pizza

8.2%

11.3%

Wendy’s

2.8%

-4.9%

Papa John’s

3.4%

3.7%

Total

1.1%

Source: Company Data, Khaveen Investments

In the previous 10 years, we see that McDonald’s market share had been eroded by rising competitors from its rivals together with Yum Brands, Restaurant Brands International and Domino’s Pizza. Notwithstanding, McDonald’s remained as market chief trailed by Yum Brands. Among its closest rivals working burger fast-food chains, Restaurant Brands International which owns Burger King had been gaining share, however Wendy’s share progress was stagnant. Between the pizza chains, Domino’s fared higher than Papa John’s because it gained extra share and maintained its lead over the corporate.

To analyze its branding, we regarded into every firm’s shops and followers on Facebook (FB). Then, we projected every firm’s progress primarily based on their historic retailer progress and income progress to undertaking the market share.

Companies

Stores

Past 10-year Store Growth

Revenue Per Store ($ mln)

Past 10-year Store Growth

Facebook Followers (‘mln’)

McDonald’s

40,031

1.7%

0.57

-3.1%

81,569,489

Yum Brands (Including Yum China)

65,427

4.1%

0.31

0.1%

100,255,665

Restaurant Brands International

41,939

7.6%

0.19

-0.3%

12,725,382

Domino’s Pizza

23,304

5.4%

0.33

6.4%

21,501,356

Wendy’s

7,289

1.1%

0.22

0.3%

7,987,579

Papa John’s

6,266

2.1%

0.33

0.4%

6,670,808

Source: Company Data, Facebook, Khaveen Investments

Based on the desk, though McDonald’s is the market chief when it comes to its dimension, its rivals Yum Brands and Restaurant Brand International have a better retailer rely than McDonald’s as these embrace a number of fast-food chains corresponding to KFC, Pizza Hut and Taco Bell (Yum Brands) and Tim Hortons, Burger King and Popeyes (Restaurant Brand International). In phrases of Facebook followers, McDonald’s has the second-highest variety of followers trailing behind Yum Brands however forward of the remainder of its rivals.

fast food market share

Company Data, Khaveen Investments

Companies

Market Share (2021)

Past 10-year Revenue Growth %

Forward 5-year Growth

McDonald’s

43.8%

-1.5%

1.32%

Yum Brands (Including Yum China)

30.9%

2.2%

4.2%

Restaurant Brands International

10.8%

26.6%

7.3%

Domino’s Pizza

8.2%

11.3%

12.2%

Wendy’s

2.8%

-4.9%

1.4%

Papa John’s

3.4%

3.7%

2.5%

Source: Company Data, Khaveen Investments

All in all, McDonald’s market management has been eroded by sturdy competitors from different fast-food chains however maintained its place because the primary fast-food firm in 2021. We anticipate the corporate to proceed dealing with robust competitors as we projected its market share to say no steadily by way of 2026 whereas Restaurant Brands International and Dominos achieve share with greater retailer and income progress.

Risks: Rising Costs

According to the corporate, it was affected in 2021 resulting from rising meals and labor prices. It expects meals and paper merchandise prices which rose by 4% within the US and three% internationally to double this yr as inflation rises. Additionally, the corporate plans to extend its wages for workers by 10% to $13/hour and additional rise to $15/hour by 2024. From its newest earnings name, the corporate’s administration defined its impression on its working earnings within the close to time period.

In 2022, we anticipate our working margin p.c will proceed to be within the low to mid-40s vary as sturdy high line momentum and minimal different working earnings can be hampered by vital commodity and labor inflation within the close to time period. – Kevin Ozan, Corporate EVP & CFO

Valuation

We summarized our income projections for the corporate primarily based on its franchised and company-operated retailer segments as mentioned within the factors above.

McDonald’s Revenue ($ bln)

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

Franchised eating places

11.66

10.73

13.085

13.66

14.27

14.90

15.56

16.25

Growth %

5.9%

-8.0%

21.9%

4.4%

4.4%

4.4%

4.4%

4.4%

Company-operated eating places

9.42

8.14

9.79

9.44

9.10

8.78

8.47

8.17

Growth %

-5.9%

-13.6%

20.2%

-3.5%

-3.5%

-3.5%

-3.5%

-3.5%

Total Revenue

21.08

18.87

22.87

23.10

23.38

23.68

24.03

24.42

Growth %

0.3%

-10.5%

21.2%

1.0%

1.2%

1.3%

1.5%

1.6%

Source: McDonald’s, Khaveen Investments

To worth the corporate, we used a DCF evaluation as we see its money movement era talents persevering with to stay sturdy. We primarily based the terminal worth on the business common of chosen rivals at an EV/EBITDA common of 19.28x.

industry average ev/ebitda

Seeking Alpha, Khaveen Investments

Based on a reduction charge of 5.4%, our mannequin reveals its shares are pretty valued.

MCD valuation

Khaveen Investments

Verdict

To conclude, we decided McDonald’s shift from company-operated shops in direction of its franchising enterprise which had grown by 3.3% in comparison with a 6.9% common previous 10-year retailer rely decline. As it shifts from the decrease margin company-operated shops (18%) to higher-margin franchise enterprise (82%), we anticipate the corporate’s margins to rise to 60.8% by 2026 with the expansion of its franchise enterprise at a forecasted charge of 4.4%. Moreover, we in contrast and analyzed the completely different franchises the place its rivals corresponding to Subway, Domino’s, Pizza Hut and Papa John’s have greater common margin per retailer and decrease preliminary charges than the corporate however nonetheless had greater than common retailer rely progress previously 5 years. Lastly, we anticipate the corporate to face rising competitors from Yum Brands, Restaurant Brands International and Domino’s Pizza and eroding its market share with a forecast of 34.3% for the corporate in 2026 however nonetheless retain its place because the market chief. Overall, we charge the corporate as a Hold with a goal value of $256.38.



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