What Will McDonald’s Look Like In 2023?

by Trefis Team
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McDonald’s (NYSE: MCD) has seen its stock rise by 55% in the last 5 months and by 9% since the beginning of this year, with its market cap standing at roughly at $160 billion. The stock now trades at close to 36x projected 2020 consensus earnings, despite the fact that the coronavirus pandemic will result in the company seeing a fall in revenues and earnings. Does this make the stock expensive? Probably not, considering that earnings could grow 30% by 2023, with net income margin growing steadily, generating continued returns for shareholders. Here’s how this is possible.

For more details on McDonald’s historical performance, see our dashboard analysis What Factors Drove 31% Change In McDonald’s Stock Between 2017 And Now?

McDonald’s revenues could grow by close to 22% from the estimated level of $19.8 billion in 2020 to $24 billion in 2023, representing a growth rate of roughly 7% per year (for context the annual growth rate was about -5% between 2016 and 2019). There are multiple trends that support this steady growth. Currently, McDonald’s is present across 112 countries with more than 39K restaurants which will continue to grow further. Trefis estimates total restaurants to be more than 42K by 2023. Average revenue per restaurant is also expected to grow by around 5% from around $0.498 million per restaurant in 2020 to $0.523 million per restaurant in 2023.

McDonald’s EPS is expected to grow continuously due to re-franchising and reduction in Operating Costs due to better operational practices. The company margins are expected to shrink to around 25% in the current fiscal year (Net Income, or profits after all expenses and taxes, calculated as a percent of revenues) due to coronavirus forced lockdowns across the world. As the pandemic subsides and things get back to normal, with better operational practices, McDonald’s margin could reach about 33% in 2023. Considering our revenue projections of roughly $24 billion and 30% margins, $7.2 billion in Net Income is likely possible by 2023.

Now, if McDonald’s earnings grow by 45% as revenue goes up by 22% and margins grow to 33%, the P/E multiple will shrink to 0.70 of its current level, assuming the stock price stays the same, correct? But that’s what McDonald’s investors are betting will not happen! If Revenues goes up 22% and margins go up to 33%, instead of the P/E shrinking from around 36x presently to about 25x, a scenario where the P/E metric falls more modestly, perhaps to about 32x looks more likely. For context, rival Starbucks trades at roughly 35x. One might assume that McDonald’s will trade slightly lower as it is highly franchised while Starbucks has about 50% company operated stores. This would make growth in McDonald’s stock price by nearly 30% a real possibility in the next three years, taking its market cap above $200 billion.

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