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McDonald's Corporation
Consumer Cyclical | Restaurants
⚡ Executive Summary
📊 THE BOTTOM LINE
McDonald's is the world's largest restaurant chain, operating a highly successful franchise model. Its global brand recognition and extensive real estate portfolio underpin a fundamentally strong business, despite facing evolving consumer preferences and intense market competition.
⚖️ RISK VS REWARD
At a current price of US$311.23, McDonald's stock trades near the average analyst price target of US$331.20, suggesting a balanced risk-reward profile. Potential upside to the high target of US$371.00 offers modest gains, while the low target of US$250.00 outlines a degree of downside protection.
🚀 WHY MCD COULD SOAR
- • Continued investment in digital ordering, loyalty programs, and delivery services could significantly expand market reach and customer frequency, boosting revenue.
- • Successful introduction of new, regionally relevant, and customizable menu items could attract new demographics and increase average check sizes globally.
- • Strategic expansion into underserved, high-growth emerging markets could unlock substantial new revenue streams and drive long-term top-line growth.
⚠️ WHAT COULD GO WRONG
- • Intensified competition and aggressive pricing strategies from rivals, including fast-casual chains, could force McDonald's to lower prices, eroding gross margins.
- • A sustained shift in consumer preferences towards healthier food options could reduce demand for traditional menu items, impacting sales in mature markets.
- • Macroeconomic headwinds, such as economic downturns or high inflation, could reduce consumer discretionary spending, impacting customer visits and overall revenue.
🏢 Company Overview
💰 How MCD Makes Money
- • McDonald's Corporation owns, operates, and franchises restaurants under the McDonald's brand in the United States and internationally.
- • The company generates revenue primarily from franchise royalty fees and lease payments, which account for roughly 60% of its total revenue.
- • The remaining revenue comes from sales at company-operated restaurants, which also serve as testing grounds for new products and operational models.
Revenue Breakdown
Franchise Royalty Fees & Lease Payments
60%
Revenue from agreements with independent franchisees for brand usage and real estate.
Company-Operated Restaurants Sales
40%
Direct sales generated from restaurants owned and managed by McDonald's.
🎯 WHY THIS MATTERS
This hybrid business model provides McDonald's with a robust and stable revenue stream. The asset-light franchise approach generates high-margin, recurring income, while company-operated stores offer direct control over brand standards, innovation, and market adaptation, ensuring a resilient and scalable operation.
⭐ Competitive Advantage: What Makes MCD Special
1. Global Brand Recognition and Scale
McDonald's is the world's largest restaurant chain, boasting over 40,000 fast-food restaurants across more than 100 countries. This unparalleled global presence and brand recognition provide a significant competitive moat, enabling highly efficient marketing campaigns and strong customer pull. Its immense scale also facilitates superior supply chain negotiation power and significant cost efficiencies, leading to competitive pricing and strong profitability.
2. Franchise Business Model
The company's pioneering franchise model allows it to expand rapidly with reduced capital expenditure, as franchisees bear the operational costs and risks. McDonald's often owns the valuable underlying real estate, leasing it to franchisees for recurring rental and royalty income. This generates stable, high-margin, and predictable cash flows, fostering a capital-efficient growth strategy and strong financial flexibility.
3. Extensive Real Estate Portfolio
McDonald's holds an extensive portfolio of strategically located real estate assets, which often includes the land and buildings for its restaurants. This real estate ownership provides a tangible, appreciating asset base that acts as a significant barrier to entry for potential competitors. It also ensures a consistent stream of rental income from franchisees, contributing substantially to the company's financial strength and long-term stability.
🎯 WHY THIS MATTERS
These distinct competitive advantages collectively establish McDonald's as a formidable market leader. The combination of its ubiquitous brand, capital-efficient franchise system, and strategic real estate holdings creates a robust economic moat, ensuring enduring profitability, resilience against economic fluctuations, and sustained market leadership.
👔 Who's Running The Show
Chris Kempczinski
Chairman and Chief Executive Officer
Chris Kempczinski became CEO in 2019, previously serving as President of McDonald's USA. With over 25 years in global consumer companies, his leadership focuses on modernizing customer experience through digital initiatives and driving operational efficiency across the global system. His background in brand management and operations supports McDonald's global strategy.
⚔️ What's The Competition
The global fast-food industry is highly competitive, characterized by numerous multinational and regional players vying for market share. Competition is based on factors such as price, menu innovation, convenience, service speed, and brand loyalty. McDonald's competes with other large quick-service restaurants, fast-casual chains, and local eateries across its diverse markets.
📊 Market Context
- Total Addressable Market - The global quick-service restaurant (QSR) market exceeds US$800 billion, projected to grow at a CAGR of 5-7%, driven by urbanization, convenience, and shifting consumer lifestyles.
- Key Trend - Digitalization of ordering and delivery services is the most critical trend, fundamentally transforming customer engagement and operational models.
Competitor
Description
vs MCD
Yum! Brands (YUM)
Operates a multi-brand portfolio including KFC, Pizza Hut, and Taco Bell, focusing on diverse fast-food segments and international expansion.
Similar franchise-heavy model, but diversified across multiple distinct brands, offering a different approach to market segmentation than McDonald's single dominant brand.
Starbucks (SBUX)
Global coffeehouse chain specializing in premium coffee, beverages, and light food items, known for its 'third place' customer experience.
Competes directly for breakfast and snack occasions but differentiates through its premium positioning and specialized beverage focus, contrasting with McDonald's broader value-oriented meal offerings.
Restaurant Brands International (QSR)
Holds iconic brands like Burger King, Tim Hortons, and Popeyes Louisiana Kitchen, with Burger King being a direct competitor in the burger segment.
Directly challenges McDonald's in the core burger market through Burger King, while leveraging a multi-brand strategy across different fast-food categories for overall growth.
Market Share - Global Fast-Food Market
McDonald's
20%
Starbucks
10%
Yum! Brands
8%
Restaurant Brands International
5%
Others
57%
📊 Valuation & Analysis
📈 Wall Street Summary
Analyst Rating Distribution - 2 Sell, 18 Hold, 14 Buy, 3 Strong Buy
2
18
14
3
12-Month Price Target Range
Low Target
US$250
-20%
Average Target
US$331
+6%
High Target
US$371
+19%
Current: US$311.23
🚀 The Bull Case - Upside to US$371
1. Digitalization and Delivery Growth
High Probability
Continued investment in mobile ordering, loyalty programs, and third-party delivery services could significantly expand reach and customer frequency, driving an additional US$3-5 billion in annual revenue and improving operating margins through enhanced efficiency and data utilization.
2. Menu Innovation and Customization
Medium Probability
Successfully introducing new, regionally relevant, and customizable menu items could attract new demographics and increase average check sizes. This could lead to a 1-2% increase in comparable sales growth globally, adding US$0.5-1 billion to annual revenue.
3. Emerging Market Expansion
Medium Probability
Strategic expansion into underserved high-growth emerging markets could unlock substantial new revenue streams. Gaining even a small foothold in large markets like India or Africa could add US$2-4 billion to top-line growth over the next five years.
🐻 The Bear Case - Downside to US$250
1. Intensified Competition and Pricing Pressure
High Probability
Aggressive pricing strategies from rivals and increasing competition from fast-casual chains could force McDonald's to lower prices or increase promotional activity, potentially eroding gross margins by 1-2 percentage points and negatively impacting profitability.
2. Shifting Consumer Health Preferences
Medium Probability
A sustained shift in consumer preferences towards healthier food options could reduce demand for traditional menu items. Failure to adapt rapidly could lead to a 3-5% decline in sales in mature markets, impacting revenue by US$1-2 billion.
3. Macroeconomic Headwinds
High Probability
Economic downturns, high inflation, or reduced consumer discretionary spending could lead to decreased customer visits and trade-downs to cheaper alternatives. This could result in a 2-4% reduction in global comparable sales, directly impacting revenue and profit growth.
🔮 Final thought: Is this a long term relationship?
If one believes premium consumers will continue to value convenience and brand consistency for the next decade, McDonald's' moat appears durable, driven by its robust franchise model and extensive real estate. The ability to adapt to changing consumer tastes and leverage digital platforms will be crucial. While management has proven adaptable, navigating future leadership transitions and maintaining innovation at scale are meaningful long-term concerns. This stock suits investors seeking compounding quality over aggressive growth.
📋 Appendix
Financial Performance
Metric
FY 2022
FY 2023
FY 2024
FY 2025 (Est)
FY 2026 (Est)
FY 2027 (Est)
Income Statement
Revenue
US$23.18B
US$25.50B
US$25.92B
US$26.27B
US$27.05B
US$27.86B
Gross Profit
US$13.21B
US$14.56B
US$14.71B
US$15.08B
US$15.53B
US$16.00B
Operating Income
US$10.35B
US$11.75B
US$11.85B
US$12.12B
US$12.71B
US$13.10B
Net Income
US$6.18B
US$8.47B
US$8.22B
US$8.41B
US$8.55B
US$8.69B
EPS (Diluted)
8.33
11.56
11.39
11.72
11.91
12.10
Balance Sheet
Cash & Equivalents
US$2.58B
US$4.58B
US$1.08B
US$2.41B
US$2.48B
US$2.56B
Total Assets
US$50.44B
US$56.15B
US$55.18B
US$60.61B
US$62.43B
US$64.30B
Total Debt
US$48.70B
US$53.09B
US$51.95B
US$55.82B
US$55.82B
US$55.82B
Shareholders' Equity
US$-6.00B
US$-4.71B
US$-3.80B
US$-2.16B
US$-2.00B
US$-1.80B
Key Ratios
Gross Margin
57.0%
57.1%
56.8%
57.4%
57.4%
57.4%
Operating Margin
44.6%
46.1%
45.7%
46.9%
46.9%
46.9%
Return on Assets (TTM)
-102.89
-179.96
-216.62
12.97
13.36
13.76
Valuation Ratios
| Metric | Value | Description |
|---|---|---|
| P/E Ratio (TTM) | 26.53 | Measures how much investors are willing to pay for each dollar of earnings over the past twelve months, reflecting current market valuation relative to historical earnings. |
| Forward P/E | 24.68 | Indicates how much investors are willing to pay for each dollar of estimated future earnings, often used to gauge future value based on analyst forecasts. |
| PEG Ratio | N/A | Measures the price-to-earnings ratio relative to the earnings growth rate, used to assess if a stock is over or undervalued given its expected growth trajectory. |
| Price/Sales (TTM) | 8.46 | Compares a company's stock price to its revenue over the last twelve months, which is particularly useful for valuing companies with little or no earnings. |
| Price/Book (MRQ) | N/A | Compares a company's market price to its book value per share, indicating how much investors are willing to pay for its net assets; a negative book value typically renders this metric less meaningful. |
| EV/EBITDA | 18.72 | Evaluates a company's total value (Enterprise Value) relative to its earnings before interest, taxes, depreciation, and amortization, useful for comparing companies with different capital structures. |
| Return on Equity (TTM) | -221.03 | Measures the profitability of a company in relation to the equity invested by shareholders over the past twelve months. |
| Operating Margin | 46.91 | Measures the percentage of revenue remaining after subtracting operating expenses, indicating how efficiently a company manages its core business operations. |
Peer Comparison
| Company | Market Cap (B) | P/E Ratio | P/B Ratio | Revenue Growth (%) | Operating Margin (%) |
|---|---|---|---|---|---|
| McDonald's Corporation (Target) | 222.10 | 26.53 | N/A | 3.0% | 46.9% |
| Yum! Brands (YUM) | 41.37 | 25.05 | 5.28 | 11.6% | 24.8% |
| Starbucks (SBUX) | 99.05 | 53.21 | N/A | 2.8% | 10.5% |
| Restaurant Brands International (QSR) | 33.45 | 25.42 | 3.54 | 16.8% | 25.9% |
| Sector Average | — | 34.56 | 4.41 | 10.4% | 20.4% |