McDonald's Efforts Paying Off

Investors couldn't have asked for much more from wide-moat

U.S. comps (3.9% growth) are getting much of the focus, as the cold beverage platform and the Signature Crafted premium burger launch drove approximately 2 points of guest count growth.

However, we believe the more meaningful investor takeaway is the comp acceleration across international lead (6.3% growth), high-growth (7%), and foundational markets (13%). This is significant because many of these markets are further along with Experience of the Future (EOTF) and delivery efforts, which offers a positive read-through for the same initiatives (along with mobile order and pay) as they are launched in the U.S. later this year. In our view, the stage is set for mid- to high-single-digit systemwide comps over the next 12-24 months.

From a profitability perspective, McDonald's appears on track to reach its post-2019 target of mid-40s operating margins. Operating margins improved 830 basis points to 37.9% and should close the year in the 40% ballpark after the completion of the China/Hong Kong transaction with CITIC and Carlyle (bringing the company close to its 2018 target of 93% franchise ownership). While U.S. margins may have contracted modestly this quarter, management attributed labor and other investments ahead of mobile order and EOTF plans in the back half of the year.

Based on increased near-term top-line optimism--both U.S. and international markets--we're planning to raise our $150 fair value estimate by $10-$15. While shares strike us as fairly valued, we don't see many downside catalysts over the next several quarters, with delivery becoming further integrated into operations, the planned digital/EOTF rollout on deck, refranchising efforts continuing as anticipated, and cash return levels set to accelerate as refranchising/EOTF efforts wind down.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.