Will McDonald’s (MCD) Regain Its Momentum?

Despite leading all restaurant stocks in financial professional searches last month with 2,697 searches – outpacing Chipotle’s (CMG) 2,317 – McDonald’s (MCD) finds itself at a critical juncture. The recent E. coli outbreak linked to slivered onions has disrupted what was shaping up to be a promising turnaround story.

Prior to the incident, McDonald’s strong execution had captured significant attention from financial professionals, with search volume nearly 5x higher than Wingstop (WING) and Domino’s (DPZ). 

The company had successfully stabilized traffic through its $5 Meal Deal and was seeing strong results from menu innovations like the Chicken Big Mac.

Through early October, the company saw comp sales approaching mid-single digits with positive guest counts. 

However, the outbreak changed that trajectory, shifting momentum to negative daily sales and guest counts. 

With the source now identified and Quarter Pounders set to return to menus, McDonald’s faces the task of rebuilding consumer trust and recapturing its sales momentum.

McDonald’s Business

McDonald’s operates over 40,000 restaurants across more than 100 countries, with approximately 95% of locations owned and operated by independent franchisees.

The company generates revenue through a combination of company-owned restaurant sales, franchise royalties and rent payments, and digital/technology fees. Its heavily franchised model provides stable, predictable cash flows while leveraging local entrepreneurship.

McDonald’s segments its business into the following areas:

• U.S. (40% of total revenues) – The company’s largest market with approximately 13,500 locations, 95% franchised.
• International Operated Markets (48% of total revenues) – Includes major markets like Australia, Canada, France, Germany, and the UK.
• International Developmental Licensed Markets & Corporate (12% of total revenues) – Includes developmental licensee and affiliate markets plus corporate activities.

Revenues are also split by owned (39% of sales), franchised (60% of sales) and other (1% of sales).

The company’s Q3 comparable sales decreased 1.5% globally, with the U.S. showing a modest 0.3% increase despite industry headwinds. 

International Operated Markets saw a 2.1% decline, while International Developmental Licensed Markets decreased 3.5%.

McDonald’s continues to execute its Accelerating the Arches strategy focused on marketing, core menu items, and digital initiatives. 

The company is seeing success with value offerings like the $5 Meal Deal in the U.S., which helped grow traffic share with low-income consumers for the first time in over a year.

The company remains focused on chicken menu innovation, with plans to offer the McCrispy sandwich in nearly 70 markets by year-end. Its Big Arch burger pilot in three international markets has shown strong results, leading to accelerated expansion plans for 2025.

Financials

Source: Stock Analysis

McDonald’s demonstrated resilient financial performance in their latest TTM results with $25.9 billion in revenue, growing 3.7% year-over-year. Operating income remained stable at $11.6 billion, with margins holding at 44.9% despite inflationary pressures.

The company’s franchise model continues generating strong cash flow, with $6.7 billion in free cash flow over the TTM period. This represents a healthy free cash flow margin of 25.7%, providing ample resources for both growth investments and shareholder returns.

Operating cash flows of $9.3 billion demonstrate the company’s ability to convert earnings to cash, supporting continued investment in digital initiatives and restaurant modernization while maintaining shareholder returns.

McDonald’s dividend growth remains robust at 9.9% annually, with the current dividend per share at $6.68. The company has maintained disciplined cost control, with SG&A expenses of $2.5 billion representing just 9.6% of revenue.

Valuation

Source: Seeking Alpha

The market isn’t sure how to price McDonald’s right now. 

Its forward P/E sits at 25.4x – far below Wingstop’s 86.1x and Chipotle’s 52.5x. 

The stock commands a premium over traditional QSR rivals, which makes sense. No other chain matches McDonald’s margins and cash flow.

Recent headwinds have created opportunity. The company’s EV/EBITDA multiple of 18.7x ignores its real estate empire and profit machine. 

McDonald’s trades at 22.5x cash flow versus Chipotle’s 43.4x and Wingstop’s 49.3x. Wall Street focuses on today’s problems, overlooking tomorrow’s franchise power.

Growth

Source: Seeking Alpha

Size shapes McDonald’s growth story. 

Revenue climbed 3.7% to $25.9 billion, which sounds modest next to Chipotle’s 15.2% surge or Wingstop’s 35.0% leap. But McDonald’s added more dollars than either competitor’s total sales.

Plus, better days lie ahead. Analysts project 5.3% revenue growth as digital initiatives take hold. 

The three-year revenue trend shows steady 4.8% gains – impressive at this scale. 

EBITDA growth slowed to 2.9% amid cost pressures. But an 11.3% rebound looms as current headwinds won’t last forever.

Profitability

Source: Seeking Alpha

McDonald’s franchise model crushes the competition, creating operating margins of 44.9% – doubling Chipotle’s 17.3% and tripling Starbucks’ 14.1%. 

The gap widens at the EBITDA line with McDonald’s 53.4% margin dwarfing the industry’s 21.9% average. 

Exceptional cost control drives a 31.8% net margin. Value menu investments may squeeze profits in the short-term. But McDonald’s scale advantage provides plenty of cushion. 

Our Opinion 7/10

The financial metrics reinforce our rating, highlighting McDonald’s superior profitability and cash generation capabilities. 

While growth lags some smaller competitors, the company’s financial strength and operational efficiency provide a solid foundation for weathering current challenges and investing in future growth initiatives.

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