Description

9/30/21

Company: McDonalds (MCD)

-          Market Cap ~ $180bn

-          SHOUT = 746mm

-          Div Yield 2.2% ($1.33 * 746mm = $1bn *4 = $4bn annual dividend)

-          Leverage (2.5x) ~ half of franchised peers at 5 to 6x leverage

-          93% Franchised Restaurant Mix

Price Target

Upside ~ $11.08/EPS in FY ’23 * 26x P/E = $288 (20% upside + 2% p.a. dividend)

Downside ~ $9.50/EPS in FY 21 * 23x P/E = $218 (-10% downside)

Risk/Reward = 2.0x  

Thesis: Over the last 18 months, MCD has been executing flawlessly under a 3-part plan, which has resulted in higher sales in the U.S., but will soon translate into:

-          Higher sales in Europe post COVID (Non-US is 60% of EBIT)

-          Global margins recovery and leverage on 2.3% G&A that’s fixed

-          Along with the comeback of capital returns after $2bn bond payment due.

At 2020 investor day, MCD guided to a HSD revenue CAGR alongside margin growth and capital returns that should yield a 10% equity return over the long-term

3 Part Plan will Show leverage Globally

1)  (M = Marketing) ~ Brand Partnerships ~ Travis Scott and BTS custom meals driving engagement. Travis Scott was the first celebrity to have his own meal since Michael Jordan in 1992. MCD is going to use this more frequently given the value of celebrities and social media to the younger generation.

2)  (C = Core Menu) ~Menu Simplification – Simplified the menu globally in order to increase efficiency and raise prices.

3)  (D = 3D) Digital, Delivery and Drive-Thru Investments ~ spending $1bn annually with franchisees on technology to reach the 65% of locations that have Drive-Thru access. Additionally, store re-models costs have begun to roll off during the pandemic. If you recall, MCD missed earnings for like two straight years (2018-2019) given the lower margins vs. consensus. Digital sales made up 20% of system-wide sales in 2020.

These initiatives are proving out in higher sales/market share gains and now margin and EPS growth.

MCD has seen accelerating U.S. comps starting in 2H20, however, we haven’t seen this in International Markets yet (62% of sales), b/c of COVID and market dynamic (less drive thru format).

Despite the Delta variant, Intl markets slowly began to thaw out in late 2Q upon re-open. Even RCL CEO today announced that demand for travel and mobility is higher in certain Intl countries vs. the U.S.

Additionally, unlike the U.S. where drive-throughs are dominant, Intl markets is more sit down, making the latter feel more like a restaurant.

As Intl reopens, MCD’s investments should begin to bear the same fruits that we are seeing in the U.S. This should result in above consensus EPS.

MCD Financial Projections

-          6% ahead in EPS over FY 2H21 through FY 23.

-          FY $11.08/share in EPS in 2023

-          Upside to buybacks as MCD is 2.5x levered on FY 21 and post debt payment at year-end, going to see $3bn in buybacks on its $7bn in FCF ($4bn dividend)

Comp Valuation vs. Peers – Outside of QSR, MCD has the 2nd cheapest valuation and trades at a material discount to DPZ, SBUX and YUM. Both all three have greater unit growth, but the valuation discount is material as MCD is a LSD unit grower vs. MSD for the others.

Catalyst

European Recovery

Buyback Ramp

Margin expansion