Here’s How “Value Meals” Can Impact McDonald’s Stock Price

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2017 has been a stellar year for McDonald’s (NYSE:MCD).  The fast food giant has successfully implemented its turnaround program with a focus on a healthier menu and using digital customer data to modify its menu based on changing customer preferences and personalized marketing. The company reported strong growth in comparable sales (an average of more than 5%) in the first three quarters of the year which was driven by growth in customer traffic. According to the company “value” and “deals” have attracted customers to its stores who are visiting more often and spending more at its restaurants. The company’s promotions around “$1 any size soft drink” and “McPick 2 for $5” have shown positive results. The company ran these promotions via mobile offers where customers were targeted based on their preferences.  Based on the success of these promotions, McDonald’s now plans to launch $1, $2,  and $3 price point value meals next year. This strategy is also focused on developing a competitive edge in the value segment.

While investments in “value” products can impact McDonald’s margins negatively, leading to a downside in its stock price, the company is confident that efficiencies in other areas such as marketing are likely to offset these costs. Further, higher customer traffic due to value meals can increase the company’s revenues, lowering fixed costs.

According to our estimates McDonald’s U.S. EBITDA (earnings before interest, tax, depreciation and amortization) margin is likely to increase from around 51% in 2017 to nearly 62% by the end of our forecast period as the company focuses on re-franchising its restaurants and customer traffic grows. However, our price estimate for the company is sensitive to this metric and a slower growth rate in EBITDA margins can lead to a downside to our price estimate. Click here to see our forecast for McDonald’s U.S. EBITDA margin and its impact on our price estimate.

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A focus on value meals can drive customer traffic and increase McDonald’s revenues in the long term. According to our estimates McDonald’s average annual revenue per U.S. franchised restaurant will remain in the range of around $350,000 over our forecast period. However a faster pace of increase in these revenues can lead to an upside in our price estimate. Click here to see our forecast for McDonald’s Average Revenue Per Franchised Restaurant – U.S.

McDonald’s strategy is not to “win on value.” The company wants to ensure that it does not lose out to competitors in the value segment. The promotions and value offers are aimed towards retaining its value conscious customers while focusing on healthy and gourmet offerings to grow. We believe while these value offerings can put pressure on the company’s margins, it is in a strong position to reduce costs in other areas and targeted promotions can lead to higher conversions –attracting more customers more frequently to its stores, driving revenues and profitability. We expect the value offerings to work positively for McDonald’s in the long term.

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