McDonald’s Profit Margins Could Suffer on Rising Agricultural Prices
McDonald’s (NYSE:MCD) which competes with Starbucks (NASDAQ:SBUX), Chipotle (NYSE:CMG), Yum! Brands (NYSE:YUM), Burger King (NYSE:BKC), and Wendy’s (NYSE:WEN), reported strong November sales earlier this month. We expect this trend to continue as the US economy recovers and McDonald’s increases its presence in Asian Markets. The company is benefiting from its global expansion initiatives, which we discussed, highlighting its creative initiatives in a recent article. (McDonald’s US Promotions, China Expansion to Help Sales)
We have a Trefis price estimate of $73.58 for McDonalds, which is around 4% below the current market price.
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In the U.S., comparable sales increased 4.9% for November through customer-focused initiatives that provide variety and value. This included the company’s nationwide promotion of McCafe Frappes and Smoothies and the everyday affordability of the Dollar Menu. In addition, the company has rolled out several promotions such as its Monopoly game and reintroducing the McRib for the month of November.
Comparable sales in Asia/Pacific, Middle East and Africa increased 2.4% for November, primarily driven by positive results in China and most other markets, as well as from marketing its differentiating factors from competitors, like, compelling value, conveniences such as delivery and drive-thru, and restaurant reimaging. McDonald’s plans to open 150 to 175 stores in China in addition to the current 1,100 stores already in China and 60,000 workers. [1]
However, increasing prices of many agricultural products like beef and diary could escalate costs for McDonalds, especially impact margins on some of its budget offering, like its famed value meal. With the fast food industry being highly competitive, leading to easy availability of substitutes, McDonalds would be under pressure to increase prices.
Currently we forecast the Company Operated Restaurants EBITDA Margin to be around 24% during our forecast period. However, if increasing input costs eat into margins, there can be a downside to our forecasts. If the Company Operated Restaurants EBITDA Margin decreases to around 20% during our forecast period, it would mean around 5% downside to our current price estimate for McDonald’s stock price.
See our full estimates for McDonald’s here.
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