MCD - McDonald's: Betting On The Fastest Expansion Phase In The Company's History

2024-02-24 11:34:04 ET

Summary

• McDonald's plans to open approximately 10,000 new stores worldwide by 2027, marking its most rapid expansion phase in history.
• The growth of McDonald's may be highly value accretive to investors, with strong profitability and distribution of free cash flow to shareholders.
• McDonald's valuation may be attractive, reflecting on the company's high quality business model, resilience, fast-paced store growth through 2027, and strong shareholder distribution.
• Based on a residual earnings model, I calculate that McDonald's stock may be trading at a slight discount to fair value.

Thesis Introduction

Over the past few months, I have gradually warmed up to the idea that McDonald's stock (MCD) deserves a "Buy" rating. Compared to my previously held "Equal-weight" thesis, which has been published in February 2023 , there were two major variables that prompted my rating reassessment: Firstly, I acknowledge that rates are slowly falling, with markets pricing about 150 basis points worth of rate cuts through 2024. If the consensus trading projection is correct, than the lower rate environment would take off pressure from valuation concerns. Secondly, I understand that the McDonald's franchise may have significant untapped penetration upside in emerging market in LATAM and APAC. In fact, by end of 2023 McDonald's management projected plans for the fastest stores expansion in the company's history, aiming to open 10,000 new stores by 2027. On that note, I highlight that McDonald's growth is highly value accretive to investors, with McDonald's operating on negative book value and generating about 29 cent of free cash flow for every incremental dollar of revenue, most of which is distributed to shareholders. Adjusting my numbers for cost of equity and EPS growth projections, I update my EPS estimates for McDonald's through 2026; and I now calculate a fair implied share price of about $317....

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