Hamburgers Own Tons of Real Estate

You’ve likely never heard of this company. But if gold continues to soar, that won’t be the case for long. Get in now for under $10.

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When people think about burgers and fries, McDonald’s frequently pops up. After all, there are over 40,000 locations across the globe, and one in nearly every town in America. 

But if someone asks you about real estate, I doubt McDonald’s comes to mind. 

In fact, out of those +40K locations, McDonald’s owns a good chunk of them, which it rents out to its franchisees, giving corporate a steady cash flow. 

This surprised us too.

During a recent writeup on Yum (YUM), we came across this little tidbit about McDonald’s real estate holdings.

Typically, McDonald’s lands in the top three for restaurant stock searches by financial pros.

More recently, it’s been in the news as it moves to discontinue operations in Russia.

Yet, despite that setback, many investors love the cash flow and growth prospects.

Some believe MCD is recession proof. 

Are they right?

Find out our thoughts below…

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McDonald’s Business

McDonald’s has the largest market cap in the restaurant sector. In fact, at $180 billion, it’s 2x as large as Starbucks (SBUX), 5x as large as Chipotle (CMG), and 46x larger than fast-food rival Wendy’s (WEN).

MCD does about $23 billion in annual revenues. It has fast-food restaurants across the globe, in over 100 countries. And more than 40,000 restaurants. 

It might surprise you, but around 93% of McDonald’s restaurants worldwide are owned and operated by independent local business owners.  

The company saw its revenues increase from $5.1 billion in Q1 2021 to $5.6 billion in Q1 2022, an 11% increase.  

The good news is that the capital-light model leaves MCD less exposed to Russia where it looks to scale back operations.

Financials

Inflation is a major concern among businesses today. And you’d think that MCD would be struggling given the current environment, but the company has remained buoyant, thanks to its strong cash flow.

You see, while most retailers are scrambling to hike prices, MCD can remain patient and selective. In fact, MCD’s gross margins have increased from 52.74% in 2019 to 54.54% TTM.

Operating margins increased slightly during that same period, going from 42.16% to 42.69% 

And while cash might become a problem for a lot of companies as interest rates are rising, it won’t be a problem with MCD.

The company generates $9.15 billion cash from its operations. 

In December 2019, it announced a share repurchase program where it would be buying upwards of $15 billion in common stock. Furthermore, it raised its dividend in 2021, which now stands at $5.52 annually. 

MCD has a current ratio of 1.10, which indicates it has enough assets to cover and short-term liabilities. 

Valuation

MCD runs a P/E ratio of 26.16x which is below its 5-year average by 6%

The company has been trading at a P/E ratio above 20x since 2017,  and been above 15x since 2014.

MCD scales at a significantly higher level than its competition. But it still maintains a better gross profit margin, which stands at 54.54% compared to SBUX at 27.8%, YUM 48%, CMG at 37.9%. 

Moreover, it has a higher EBITDA Margin at 50.6% compared to SBUX at 20.5%, CMG at 14.3%, and YUM at 33.9%. 

They can’t beat its net income margin of 29.9% either. 

If you want to find one knock on MCD its revenue growth. Its forward revenue growth of 8.4% is not as good as SBUX at 14.8% or CMG at 18.8%.

However, growth comparisons can be misleading considering how much bigger MCD is than its competition. 

Our Opinion – 8/10

During times of uncertainty, investors will flock to safe-haven stocks. MCD is one of those companies. 

Furthermore, many investors believe the company is recession proof.

Why?

For two reasons.

First, the company owns a lot of the land and buildings it leases out to its franchise owners. It makes a significant amount of money as a landlord and reduces its operational risk.

Second, it’s become such a part of culture that it acts more like a consumer staple than a discretionary item.

Since 2008, MCD has had two negative return years, 2012 and 2014. Currently, in 2022, it is down about 7%. 

We believe MCD is a buy here. And a long-term hold for many years.