Could there be some upside to McDonald’s? We think so. Based on an upside scenario that goes beyond Trefis’ current assumptions, we estimate an upside price of 10% – 15% above the current market price of $91.
Our upside scenario is primarily based on the significant opportunity McDonald’s has to grow its store base outside the US, especially in Asia-Pacific, the Middle East, and Africa (APMEA). APMEA currently accounts for 22% of McDonald’s revenues and 18% of its operating income. This segment has been growing operating income at a 24% CAGR from 2004 to 2011.
Based on our estimates of global affordability for McDonald’s outlined below, we believe McDonald’s could comfortably add another 10,000 restaurants to its current store base over the long term and add 7,000 of those by 2019. Assuming the current franchise to company-owned mix remains at 80%, that would mean 5,600 new franchise restaurants and 1,400 new company owned restaurants by 2019.
We use the current Trefis estimates for the number of customers per restaurant, average spend per customer and margins, and find that the company would add an additional $6 BN in revenues and another $1.2 BN in EBITDA. That compares to 2011 revenues of $27 BN and EBITDA of $10.5 BN. This potential 11.4% increase in EBITDA over the next several years would add another $10.5 BN to McDonald’s current market capitalization of $91.6 BN, or roughly $15 to the stock price.
So, how do we arrive at our estimate of potential new stores?
To answer this question, we need to first segment the world population by income. Then, by choosing an annual income cutoff for ‘McDonald’s affordability’, we can determine the number of people in the world that would fall in this segment. This logic maintains that McDonald’s would not build a store unless it knew that people in that area could afford to eat there.
How do we determine that annual income cutoff?
The median household income in the US according to the census bureau is ~$50,000. However, many people with incomes below that level can afford to eat at McDonald’s. The World Bank in 2002 proposed that the proper measure of the global middle class was people with daily incomes between incomes $10 and $50 a day. This translates roughly to a $3,500 to $18,000 annual income. As another triangulation point, the global income needed to buy a car is around $4,000.  To stay conservative, we chose $10,000 or ~$25 a day as the cutoff for ‘McDonald’s affordability’. That according to World Bank Development Research Group translates to ~13% of the world population or 900 MM people.  Excluding the people in the US that fall in that category, the number of people that can afford McDonald’s outside the US is ~600-650 MM people. If we assume that over time this estimate grows at a 5% CAGR, that figure would be 900 MM people by 2019, the end of our forecast period. Note, as a reference, the middle class in China, India, and Russia is projected to grow annually by 9.4 percent, 5.8 percent, and 2.4 percent, respectively, over the coming two decades. 
Finally, how do we use that figure to estimate the total number of possible McDonald’s restaurants?
There are approximately 14,000 McDonald’s restaurants in the mature US market. That means there are roughly 47 restaurants per 1 MM people in the US. Applying that figure to the 900 MM estimate that we calculated, McDonald’s potential footprint outside the US would be 43,000.
However, we need to keep in mind that the appetite for McDonald’s and burgers in general outside the US is considerably less than what it is in the US. If we haircut our restaurants per capita estimate to 70%, we get a potential McDonald’s footprint outside the US of 30,000, which added to the 14,000 in the US gets you 44,000 total McDonald’s restaurants globally by 2019. This is 10,000 more restaurants than what McDonald’s has currently, translating to approximately 1,500 restaurants per year, a bit on the higher end given that they opened only 800 restaurants last year.
Assuming that they can ramp up construction to 1,000 restaurants per year, we would get 40,500 restaurants by 2019, 7,000 more than what they have currently. Maintaining the current franchised to company-owned ratio of 80%, there would be 32,400 franchise units and 8,100 company owned units by 2019.
Entering those values into our valuation tool gives us a Trefis price estimate of $105, or 15% above the current market price.
Risks and Next Steps
Our analysis depends on our assumptions about the ‘McDonald’s affordability’ cutoff, the world’s appetite for McDonald’s, and the number of restaurants McDonald’s can realistically build each year. Any meaningful variation in these assumptions would impact our analysis and valuation. For simplicity, we have also assumed that the number of customers per restaurant, average spend per customer and margins are the same in these geographies. In future articles we hope to dig deeper into some of these key assumptions. Stay tuned.Notes: