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McDonald's Well Positioned for Long Term, Shares Cheap

Recovery for the wide-moat firm will be prolonged, but we view its dividend as one of the safest in the industry.

Securities In This Article
McDonald's Corp
(MCD)

With McDonald's MCD reporting preliminary sales trends on April 8, its first-quarter update offered an opportunity to assess April sales trends, the health of its franchisee base, and future capital allocation plans (including its dividend). While we expect a prolonged recovery from COVID-19--which could put roughly 30% of the 1 million U.S. restaurants at risk of permanent closure the next 12-18 months--we believe wide-moat McDonalds is well positioned to compete for market share ceded by smaller independents.

April sales trends reflect the operating restrictions and recovery curves of its respective markets. Weekly comps bottomed at 25% in the U.S. during April and will likely end down 20% for the month. International operated (IO) markets (including European markets where restaurants were fully closed) continued March's 70% comp decline into April. International developmental licensed (IDL) market comps fell 19% during March but were helped by China's gradual recovery (midteens declines in April). While there are several unknowns, our model now calls for a 7% comp decline in the U.S., midteens decline in the IO segment comps (dependent on government reopening mandates), and a mid-single-digit decline in the IDL segment this year. This is ahead of our comp outlook for much of the industry due to app/delivery enhancements, a streamlined menu, experience with previous reopening situations (including China and Experience of the Future remodels), and franchisee health (most entered 2020 with all-time high cash flows), factors that should drive mid- to high-single-digit comps in 2021-22.

Despite minor model adjustments, our $205 fair value estimate remains unchanged and we see shares as undervalued. Management acknowledged that its dividend is a key capital allocation priority, and we still view McDonald's dividend as one of the safest in the industry. Even if its dividend were cut, we'd still expect its payout ratio to remain ahead of industry averages.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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