McDonald’s: Why Did The Stock Double In 4 Years?

McDonald’s (NYSE: MCD) stock price has increased more than 2x from $97/share in August 2015 to $211/share in August 2019. The increase was primarily driven by continuous re-franchising and a sharp rise in margins, Revenue growth and strong margins are expected in 2019. A positive outlook has driven a sharp rise in the company’s price-to-sales (P/S) and price-to-earnings (P/E) multiples.

You can view the Trefis interactive dashboard –Why McDonald’s Stock Climbed 2x in 4 Years? In addition, here is more Consumer Discretionary data.

McDonald’s Revenue fell over the years due to re-franchising:

• In the last 4 years McDonald’s revenue has fallen from $25.4 billion in 2015 to $21 billion in 2018. The fall has been primarily due to the re-franchising initiative of the company.
• The company has a goal of running 95% of its restaurants under the franchise model. (92.7% at the end of FY 2018)

US is one of the Primary Revenue markets:

• US revenues have moved from $8.6 billion in 2015 to $7.7 billion in 2018. The fall as mentioned before is due to the company re-franchising the restaurants. Due to this Company Operated Restaurants in the US decreased from 1425 in 2015 to 685 in 2018.
• US leads the contribution to Total Revenue for the group at 36.5% in 2018.
• Trefis estimates the segment to contribute $8.1 billion in 2019 as the new restaurants get added.

International Lead Markets a close second to US in contribution to Total Revenue:

• International Lead market revenues were a close second in the contribution to Total Revenue for the group at 36.1% in 2018.
• International Lead market revenues fell in 2016 to $7.2 billion in revenues but have grown at a steady pace to $7.6 billion in 2018. This is primarily due to franchise restaurants increase by more than 2x, i.e. from 2,422 in 2015 to 5,216 in 2018.
• Trefis estimates the segment to contribute $7.8 billion in 2019 as the average check goes higher and more restaurants get re-franchised.

Improvement In Profitability:

• Due to the re-franchising initiatives and better comparable sales the company has seen continuous improvements in Net Income margin over the years (17.8% in 2015 to 28.2% in 2018). Trefis estimates the metric to increase to 29.5% in 2019.
• Direct Expenses as % of Revenues has seen significant improvement over the years (59.7% in 2015 to 44.9% in 2018). This is due to better operational efficiency and continuous re-franchising. The metric is expected to decline further to 41% in 2019.
• Finance costs as % of Revenues have been between 4-5% in the last couple of years and Trefis estimates it to remain around 4.3% in 2019.
• The decrease in statutory tax rate reduced the company’s Tax rate by a huge margin in 2018 (39.4% in 2017 to 24.2% in 2018). We expect it to slightly fall to 23.7% in 2019.
• Further, Capex as % of revenue has also increased to 13% in 2018 and Trefis estimates the slight fall to around 12% in 2019.

Higher Multiple:

• MCD’s P/S multiple has improved from 3.7x in July 2015 to 7.9x in July 2019 while its P/E multiple has improved from 22.5x in August 2015 to 28.3x in August 2019.
• Though, the company’s global peers such as Yum Brands and Chipotle have seen their multiples fluctuate in the last few years. Domino’s had a steady growth in its P/S multiple (3x in July 2015 to 3.8x in July 2018 ) before its drop back to 3 in July 2019 while its P/E multiple was steady between 36x-39x before falling to 27.3x in July 2019.
• However, as of August 2019, MCD commands a higher multiple compared to its major peers, driven by the company’s strategy to focus on re-franchising, improving operational efficiency, and introducing new initiatives like “Experience Of The Future” (EOTF) restaurants which will have self-serve kiosks and table service.

Higher multiple and a positive outlook bodes well for MCD’s stock and fundamentals. As per McDonald’s Valuation by Trefis, we have a price estimate of $233 per share for MCD’s stock.

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