McDonald's Should Carry Momentum Into 2018

We think the wide-moat firm is now in a place of strength.

Securities In This Article
McDonald's Corp
(MCD)

Wide-moat

Tax reform gives McDonald's the chance to accelerate aspects of its U.S. velocity growth plan, with plans to invest $6 billion over the next two years (including capital expenditures of $2.4 billion in 2018) in its Experience of the Future restaurant format, which was implemented in 3,000 locations in the U.S. at year-end, with another 4,000 expected in 2018. While these and other technology and labor investments will weigh on near-term margins, we still see a clear path to mid-40s operating margins by 2019-20 through recent refranchising efforts and operating leverage from the aforementioned top-line drivers.

We're planning a moderate increase to our $170 fair value estimate for time value of money adjustments and a lower effective tax rate. While the shares strike us as fairly valued, we don't see many downside catalysts, with new sales levers becoming greater contributors and cash return levels set to accelerate.

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About the Author

R.J. 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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