McDonald's: Is a real estate company and not a food company.

McDonald's is the world’s largest quick service restaurant chain and a dominant player in the global informal eating out segment. Known for its iconic menu items such as the Big Mac, World Famous Fries, and Chicken McNuggets, the company combines strong brand recognition with a highly scalable, franchise-based business model that is supported by significant real estate ownership. With tens of thousands of restaurants worldwide, continuous menu innovation, and a growing focus on digital, delivery, and beverages, McDonald’s aims to strengthen its position as a global leader in affordable and convenient dining while driving long term growth. The question remains: Does this global fast food giant deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should mention that I do not own any shares in McDonald's at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of McDonald's, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

McDonald's was founded in 1940 in the United States and has grown into the world’s largest quick service restaurant chain, operating more than 45.000 restaurants across over 100 countries. The company is primarily a franchisor, with around 95% of its locations owned and operated by independent franchisees, which defines its capital light and highly scalable business model. McDonald’s generates revenue from two main sources, direct sales from company operated restaurants and fees from franchised restaurants, which include rent, royalties based on a percentage of sales, and initial franchise fees. Under its conventional franchise model, McDonald’s typically owns or leases the land and building, while franchisees invest in equipment and handle daily operations, allowing the company to act both as a restaurant operator and as a landlord. In international markets, the company also uses developmental licenses and affiliate structures, where local partners own the assets and operate the business while paying royalties, enabling expansion with minimal capital requirements. The business is organized into three main segments, the United States, International Operated Markets such as the United Kingdom, Germany, France, and Australia, and International Developmental Licensed Markets, with a strong focus on growth in countries like China. McDonald’s core offering is a globally consistent menu of affordable and convenient food, including iconic products such as the Big Mac, Quarter Pounder, Chicken McNuggets, and World Famous Fries, complemented by ongoing innovation in areas such as chicken and premium burgers. The brand primarily targets value conscious consumers while maintaining broad appeal across income groups due to its combination of price, speed, and consistency. Its digital ecosystem, including a large global loyalty program and mobile ordering platform, enhances customer engagement, increases visit frequency, and supports personalized marketing. McDonald’s competitive moat is primarily built on its real estate ownership, global scale and cost advantages, brand strength, franchise model, and digital ecosystem. The real estate advantage is one of the most important and often overlooked parts of the business. McDonald’s controls many of the locations where its restaurants operate by owning or holding long term leases on the land and buildings. This effectively makes the company a landlord to its franchisees, allowing it to collect rent that is often more stable than restaurant sales. This structure creates a predictable and resilient income stream, especially during weaker economic periods. It also gives McDonald’s control over prime locations and leverage in its relationship with franchisees, which helps maintain high standards across the system. Another key advantage is the company’s global scale and cost structure. With tens of thousands of restaurants and massive systemwide sales, McDonald’s has significant purchasing power when sourcing ingredients such as beef, chicken, and potatoes. This allows the company to negotiate lower input costs than most competitors. These cost advantages enable McDonald’s to maintain strong value offerings while still protecting margins. The ability to consistently offer affordable meals is critical in attracting value conscious consumers and reinforces its competitive position across different economic environments. The brand itself represents one of the company’s strongest advantages. McDonald’s is one of the most recognized brands in the world, built over decades of consistent marketing and global presence. Iconic products such as the Big Mac and Chicken McNuggets are deeply embedded in consumer culture and act as powerful drivers of repeat traffic. This high level of brand awareness reduces customer acquisition costs and creates trust with consumers, as they know what to expect regardless of location. The consistency of the experience across countries further strengthens this advantage and makes it difficult for smaller competitors to replicate. The franchise model is another core pillar of the moat. By relying on independent franchisees to operate the majority of its restaurants, McDonald’s is able to expand rapidly without taking on the full capital burden of opening and running each location. Franchisees are typically highly invested in their businesses, both financially and operationally, which creates strong alignment and local execution. At the same time, McDonald’s benefits from a steady stream of high margin revenue through rent and royalties. This combination of local entrepreneurship and centralized control creates a highly efficient and scalable system. The digital ecosystem has become an increasingly important advantage in recent years. McDonald’s has built a large and growing base of loyalty members and app users, which allows the company to collect valuable customer data. This data is used to deliver personalized offers and promotions, increasing visit frequency and customer spending. Over time, this creates a feedback loop where more users generate more data, leading to better targeting and stronger engagement. This not only improves the customer experience but also strengthens customer loyalty and lifetime value. Finally, McDonald’s continues to invest in technology to improve operations across its restaurants. This includes initiatives such as AI driven drive thru systems and digital kitchen management tools. These technologies help increase speed, accuracy, and efficiency, which are critical in the quick service restaurant industry. By improving throughput and reducing errors, McDonald’s enhances the customer experience while also increasing profitability. This growing technological edge further widens the gap between McDonald’s and smaller competitors that lack the resources to invest at the same scale.

Management

Chris Kempczinski serves as the President and CEO of McDonald's, a role he assumed in 2019. He joined McDonald’s in 2015 as Executive Vice President of Strategy, Business Development and Innovation, and was promoted to President of McDonald’s USA just over a year later. In this role, Chris Kempczinski oversaw the operations of approximately 14,000 restaurants and played a key role in accelerating customer focused initiatives across the business. He holds a bachelor’s degree from Duke University and an MBA from Harvard Business School. Prior to joining McDonald’s, Chris Kempczinski held senior leadership roles at several major consumer companies, including Procter and Gamble, PepsiCo, and Kraft Foods, where he developed extensive experience in brand management, strategy, and operations across a wide range of consumer products. His early tenure as CEO was defined by extraordinary challenges, most notably navigating McDonald’s through the global COVID 19 pandemic. The second quarter of 2020 marked the most difficult period in the company’s history, yet under his leadership, McDonald’s recovered quickly and returned to pre pandemic sales levels by the fourth quarter of that same year. During this period, Chris Kempczinski emphasized transparency, agility, and clear communication, which helped maintain strong alignment across the organization. As CEO, Chris Kempczinski introduced the “Accelerating the Arches” strategy, which remains the foundation of McDonald’s long term growth plan. This strategy is built around three core priorities, maximizing marketing, committing to the core menu, and expanding the company’s capabilities in digital, delivery, and drive thru. Under his leadership, McDonald’s has significantly strengthened its digital ecosystem, growing its global loyalty program to hundreds of millions of active users and integrating mobile ordering more deeply into the customer experience. This focus on digital engagement has helped increase customer frequency and improve personalization, reinforcing the company’s competitive position in an increasingly technology driven industry. Chris Kempczinski has also placed a strong emphasis on operational consistency and franchisee alignment, recognizing that the success of McDonald’s depends on the strength of its global system. He has worked closely with franchisees to ensure that value leadership remains central to the brand, while also supporting initiatives that improve restaurant operations, such as menu simplification, kitchen modernization, and the adoption of new technologies. His leadership approach reflects a balance between maintaining the core strengths of the business and adapting to changing consumer preferences, particularly in areas such as convenience, affordability, and digital ordering. In addition to operational improvements, Chris Kempczinski has overseen continued investment in technology and infrastructure, including partnerships to enhance data capabilities and the rollout of AI driven solutions to improve speed and accuracy in restaurants. These initiatives are aimed at increasing efficiency across the system while enhancing the customer experience. At the same time, he has reinforced the importance of brand relevance through marketing and cultural engagement, ensuring that McDonald’s continues to resonate with both existing and new generations of consumers. Chris Kempczinski is often described as a detail oriented and analytical leader with a strong focus on execution and long term value creation. He has highlighted the importance of continuous learning and adaptability, often referencing companies such as Amazon, Nike, and Walmart as examples of excellence in areas such as customer focus, brand engagement, and organizational culture. His leadership during a period of significant disruption, combined with his clear strategic direction and focus on strengthening the company’s core advantages, suggests that Chris Kempczinski is well positioned to guide McDonald’s through its next phase of global growth and innovation.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. McDonald's has consistently achieved a ROIC well above this threshold, with returns generally ranging between the mid-teens and mid-twenties over the past decade. Even in 2020, which was an unusually difficult year, ROIC remained above 10%. This level of consistency is very strong and highlights the quality and resilience of the underlying business model. Several structural characteristics explain why McDonald’s has historically generated high ROIC. First, the franchise model is the most important driver. Around 95% of restaurants are operated by franchisees, which means McDonald’s earns royalties and rent without having to invest heavily in running each location. Franchisees are responsible for day-to-day operations, staffing, and most of the capital expenditures related to the restaurant itself. This allows McDonald’s to generate strong earnings while keeping its own capital requirements relatively low, which is a key driver of high ROIC. Second, the company’s real estate strategy plays a central role. McDonald’s often owns or secures long-term leases on the land and buildings where its restaurants operate. These sites are then rented to franchisees, creating a stable and predictable income stream. Importantly, real estate ownership also gives McDonald’s control over prime locations and strengthens its bargaining position with franchisees. Because this income is less volatile than restaurant-level sales, it contributes to both stability and strong returns relative to the capital invested. Third, McDonald’s benefits from very strong operating margins driven by its scale and business model. The company’s global footprint allows it to negotiate favorable terms with suppliers and maintain efficient operations across thousands of locations. At the same time, the franchised structure means that a large portion of revenue comes from high-margin streams such as royalties and rent rather than lower-margin restaurant sales. This combination of high margins and relatively modest capital intensity supports elevated ROIC levels. Fourth, the strength of the brand also contributes to high returns. McDonald’s is one of the most recognized brands in the world, which drives consistent customer traffic without requiring the same level of incremental investment as less established competitors. This reduces the amount of capital needed to generate revenue growth and supports strong profitability over time. Looking at the development over the past decade, ROIC has remained relatively stable despite some fluctuations. The decline in 2020 is clearly linked to the pandemic, which impacted restaurant traffic globally. The recovery in 2021 and 2022 reflects the resilience of the business model, while the more recent normalization around the high teens to low twenties suggests a stable underlying return profile. These fluctuations are not structural but rather driven by external factors such as economic conditions and temporary changes in sales volumes. Looking ahead, ROIC is likely to remain high, although it may fluctuate within a range rather than trend significantly higher. The key structural drivers are still firmly in place. The franchise model continues to limit capital intensity, the real estate portfolio provides stable income, and the brand remains extremely strong. At the same time, there are factors that could modestly pressure ROIC. Continued investments in digital platforms, technology, and restaurant modernization will increase the capital base. In addition, expansion in international markets, particularly through developmental licenses, may initially generate lower returns until those markets mature.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders, like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. However, McDonald's stands out because equity has been negative for many years, which makes it look unusual compared to most companies. The primary reason for this is McDonald’s capital allocation strategy, particularly its extensive share repurchase programs. The company has consistently returned large amounts of cash to shareholders by buying back its own shares. When a company repurchases shares, the cash used reduces equity on the balance sheet. Over time, McDonald’s has spent more on buybacks than it has retained in earnings, which has pushed equity into negative territory. This is not a reflection of weak performance, but rather a deliberate decision to distribute excess capital instead of keeping it within the business. Another important factor is the company’s use of debt. McDonald’s has increased its leverage over time and has used debt as a tool to fund share repurchases. This reduces equity further because liabilities increase while equity decreases. For a business with stable and predictable cash flows, this can be an efficient way to structure the balance sheet and enhance returns to shareholders. The nature of McDonald’s business model also plays a key role. Because the company operates a highly capital-light franchise system, it does not need to retain large amounts of capital to support growth. Franchisees are responsible for most of the investment in restaurants, while McDonald’s earns royalties and rent. This allows the company to generate strong earnings without building up equity on the balance sheet. Fluctuations in equity over time are mainly driven by the balance between earnings and capital returns. Periods where equity becomes less negative typically reflect strong profitability, while periods of more aggressive share repurchases or higher leverage push equity further down. These movements are therefore linked to capital allocation decisions rather than changes in the underlying strength of the business. Importantly, negative equity does not indicate a weak business in McDonald’s case. The company generates strong and consistent cash flows and maintains high returns on capital. Because the business does not require large reinvestments to grow, management has chosen to return excess capital to shareholders instead of accumulating it on the balance sheet. Looking ahead, equity is unlikely to turn positive unless McDonald’s significantly changes its capital allocation strategy. As long as the company continues to prioritize share repurchases and maintains a leveraged balance sheet, equity will likely remain negative. This should be seen as a structural feature of the business rather than a concern, reflecting a capital-efficient model that prioritizes shareholder returns.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. McDonald's has historically generated strong free cash flow and high free cash flow margins. This is largely a result of the company’s business model, which combines high margins, stable revenue streams, and relatively low capital requirements. One of the main drivers of McDonald’s strong free cash flow is its high profitability. A large portion of its revenue comes from franchised restaurants, where the company earns rent and royalties. These revenue streams carry significantly higher margins than operating restaurants directly because McDonald’s does not bear the day to day operating costs. As a result, a substantial share of revenue is converted into operating profit and ultimately into cash flow. Another important factor is the capital-light nature of the business. Because around 95% of restaurants are franchised, McDonald’s does not need to invest heavily in building and operating new locations. Franchisees fund most of the investment in equipment, staff, and operations, while McDonald’s focuses on maintaining the system and supporting growth. This means that capital expenditures remain relatively modest compared to the earnings generated, which supports strong free cash flow conversion. The company also benefits from a stable and predictable business model. McDonald’s operates at a global scale with a highly standardized system, which results in consistent cash generation across economic cycles. Its strong brand and focus on value ensure steady customer demand, which further supports reliable cash flows year after year. The fluctuations seen in recent years are mainly driven by changes in capital expenditures. For example, the decline in free cash flow and margins in certain years reflects periods where the company has increased investment in new restaurant openings, technology, and digital infrastructure. Management has indicated that the coming years will include elevated investment levels, particularly related to expansion and system-wide improvements. While this temporarily reduces free cash flow, these investments are intended to support long-term growth and efficiency. Looking ahead, McDonald’s is expected to remain a strong generator of free cash flow, although margins may fluctuate slightly during peak investment periods. The core drivers remain intact, including high-margin franchised revenue, limited capital requirements, and strong operating efficiency. As investment levels normalize, free cash flow conversion is expected to remain high, supported by the underlying strength of the business model. McDonald’s uses its free cash flow in a disciplined and consistent way. First, the company reinvests in the business through capital expenditures, primarily focused on opening new restaurants and investing in technology, digital capabilities, and system improvements. These investments are aimed at driving long term growth and improving operational efficiency. Second, the company prioritizes its dividend, which is a core part of its capital allocation strategy and has been increased for decades, making it one of the most reliable dividend growers in the market. This reflects management’s commitment to returning a stable and growing portion of cash flow to shareholders. Finally, any remaining free cash flow is used for share repurchases over time. This balanced approach allows the company to invest in growth while consistently returning significant capital to shareholders. While the free cash flow yield suggests that the shares are trading at a premium valuation, it also indicates that the valuation is more attractive than it has been in many years. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Based on my calculations, McDonald's currently has 4,7 years of earnings in debt. This is higher than I would typically like to see, but it is not unexpected given that McDonald’s has used debt to fund share buybacks. While this level of debt does not stop me from considering an investment in McDonald’s, it is certainly something I will continue to monitor. That said, there are several reasons why McDonald’s higher debt is less concerning. First, the business generates very stable and predictable cash flows from franchise royalties and rent, which helps ensure it can comfortably cover interest payments even during weaker economic periods. Second, with about 95% of its restaurants franchised, McDonald’s operates a capital-light and efficient model, which means it does not need to reinvest large amounts of cash to keep the business running. Third, the company has strong and consistent free cash flow, which gives it flexibility to reduce debt if needed. In practice, this means that even though the debt level is higher than I prefer, the business has the ability to manage it over time. Finally, McDonald’s has intentionally structured its balance sheet this way as part of its capital allocation strategy, choosing to return more cash to shareholders rather than keeping a large equity buffer. Overall, while the debt level is higher than my preferred threshold, the quality and stability of the business make it manageable.

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Risks

Changing consumer preferences is a risk for McDonald's because the company’s core offering is built around affordable, convenient, and often calorie-dense food, while consumer behavior is gradually shifting in ways that may not fully align with this positioning. One of the clearest trends is the growing focus on health and wellness. As awareness around obesity, diabetes, and general health increases, more consumers are seeking lower calorie, higher protein, and less processed food options. This is particularly relevant in developed markets, where demand for transparency, healthier ingredients, and more balanced diets continues to grow. If a meaningful share of consumers reduces their consumption of traditional fast food, it could negatively impact traffic and sales over time. A newer and potentially more structural factor is the increasing use of GLP-1 weight loss drugs such as Ozempic and Wegovy. These drugs suppress appetite and lead to lower calorie intake, and early data suggests that users tend to eat less, snack less, and in some cases dine out less frequently. While the long-term impact is still uncertain, this trend could gradually reduce demand for high-calorie meals if adoption becomes widespread. Management has acknowledged that they are closely monitoring this development. So far, they have not seen a material impact on the business, but they do expect adoption to increase and recognize that it can influence both how much consumers eat and what they choose to eat. For example, there may be a shift toward more protein-focused meals and away from sugary drinks and snacks, which could require adjustments to the menu over time. Beyond health trends, consumer preferences are constantly evolving due to generational shifts and changing lifestyles. Younger consumers often expect a higher degree of customization, whether that is through build-your-own meals, flexible portion sizes, or options tailored to specific dietary needs. At the same time, there is growing interest in plant-based options, alternative proteins, and lighter menu choices, which are becoming more mainstream rather than niche preferences. This can be challenging for a company like McDonald’s, which relies heavily on standardized menus and operational efficiency across thousands of locations. Introducing more customization or niche offerings can increase complexity and reduce efficiency if not executed carefully. Sustainability is another area where consumer expectations are changing. More consumers are paying attention to packaging, sourcing, and the environmental impact of their food choices. This includes concerns about single-use plastics, animal welfare, and the carbon footprint of beef production. As these concerns become more important in purchasing decisions, McDonald’s may face pressure to adapt its sourcing and packaging practices, which could increase costs or require operational changes.

Competition is a risk for McDonald's because the company operates in the informal eating out segment, which is one of the most competitive and dynamic areas in the food industry. McDonald’s does not only compete with traditional fast food chains, but also with fast casual restaurants, coffee chains, convenience stores, grocery retailers, and increasingly digital-first food providers. Many of these competitors are targeting the same value-conscious and time-constrained consumers, offering convenient and affordable alternatives that can directly substitute a McDonald’s meal. This broad competitive set makes it difficult to maintain consistent traffic growth, especially in periods where consumer spending is under pressure. One of the most important competitive pressures in recent years has come from grocery stores and eating at home. As food consumed at home has become relatively more affordable, particularly during periods of inflation, some consumers have chosen to reduce spending on dining out. This has led to periods where the overall informal eating out segment has contracted, especially among lower-income consumers. For McDonald’s, which relies heavily on high transaction volumes, even small shifts in consumer behavior toward eating at home can have a noticeable impact on traffic and sales. Competition is also intense within the traditional quick service restaurant category. McDonald’s faces direct competition from burger chains such as Wendy’s and Burger King, which often compete aggressively on price and promotions. At the same time, chains like Chick-fil-A are gaining market share in key categories such as chicken by focusing on product quality and customer experience. Other competitors such as Taco Bell compete through menu innovation and strong brand engagement, particularly among younger consumers. Coffee-focused chains such as Starbucks compete for morning traffic and beverage occasions, which are important dayparts for McDonald’s. This means McDonald’s must compete across multiple categories at the same time, each with different competitive dynamics. Pricing is another key battleground. The industry is characterized by frequent price competition and promotional campaigns. While McDonald’s has historically been a leader in value, maintaining this position is not always easy. Competitors can launch aggressive promotions or undercut pricing in certain markets, forcing McDonald’s to respond in order to protect traffic. At the same time, lowering prices or increasing promotions can put pressure on margins, which creates a trade-off between maintaining volume and protecting profitability. The competitive landscape is also constantly evolving. New entrants, changing consumer habits, and consolidation within the industry can all shift the balance over time. Strategies that work well in one period or market may not be as effective in another. McDonald’s must continuously improve its menu, pricing, operations, and customer experience while responding quickly to competitor actions. This creates a complex balancing act where improvements in one area can sometimes negatively impact another, such as when increased menu variety adds operational complexity.

Food safety is a risk for McDonald's because the company operates at an enormous global scale with a highly complex supply chain, making it difficult to fully eliminate the risk of contamination, errors, or food-borne illness. McDonald’s serves millions of customers every day across tens of thousands of restaurants, sourcing ingredients from a wide network of suppliers and preparing food in decentralized locations. Even with strict standards and controls in place, this scale increases the likelihood that issues can arise somewhere in the system, whether at the supplier level, during transportation, or in restaurant operations. One of the most significant aspects of this risk is the potential impact on consumer trust. McDonald’s brand is built on consistency, reliability, and safety, and any food safety incident can quickly undermine these perceptions. Even a single event, whether confirmed or only suspected, can lead to negative headlines and widespread concern among consumers. This risk materialized in 2024, when an E. coli outbreak in the United States was linked to ingredients used in Quarter Pounders. The incident led to a decline in U.S. sales, and because the Quarter Pounder is a high-margin product, the impact on profitability was more pronounced. This illustrates how even a localized issue can have a disproportionate financial effect. The risk is amplified by the speed at which information spreads in today’s digital environment. Social media and online news platforms can quickly turn a local incident into a global story, often before all facts are known. This can prolong negative sentiment and make it more difficult for the company to restore confidence. In some cases, the perception of a problem can be as damaging as the problem itself, especially if it leads consumers to question the safety or quality of the brand. Another important factor is the complexity of McDonald’s operating model. The company relies heavily on franchisees to run its restaurants, which means that maintaining consistent food safety standards requires strong oversight and coordination across thousands of independent operators. In addition, the growing importance of delivery and digital ordering introduces more touchpoints in the process, increasing the number of areas where issues can arise. Third-party delivery partners, for example, may affect how food is handled after it leaves the restaurant, which can influence the overall customer experience. Food safety incidents can also lead to direct financial costs. These may include product recalls, temporary restaurant closures, legal liabilities, and increased spending on marketing and promotions to rebuild customer trust. In addition, the company may need to invest further in supply chain monitoring, training, and technology to prevent future issues. While these actions are necessary, they can weigh on margins in the short term. Beyond the immediate financial impact, food safety concerns can have longer-term effects on brand perception. If consumers begin to associate the brand with safety concerns, even temporarily, it can reduce traffic and weaken loyalty. In a highly competitive market, this can push customers toward alternatives that are perceived as safer or higher quality. Because McDonald’s operates globally, even isolated incidents have the potential to influence perceptions in other regions, especially if they receive significant media attention.

Reasons to invest

Opening new restaurants is a reason to invest in McDonald's because it remains one of the most important drivers of long-term growth, even for a company that is already operating at massive global scale. While many mature companies struggle to find meaningful growth opportunities, McDonald’s has identified a clear and actionable path to expand its footprint, targeting approximately 50.000 restaurants by the end of 2027. This continued expansion allows the company to grow system-wide sales, increase market penetration, and strengthen its competitive position across both developed and emerging markets. One of the most important aspects of this growth strategy is that it is not simply about opening more restaurants, but about opening the right restaurants in the right locations. Management has invested significant time and resources into identifying gaps in existing markets, including highly developed regions such as the United States. Population shifts and changes in consumer behavior have created new opportunities where McDonald’s presence has not kept pace historically. By targeting these underpenetrated areas, the company is able to capture incremental demand rather than cannibalizing existing locations. Early results have been encouraging, with new restaurants delivering strong first-year sales and attractive returns in the low-to-mid teens. Another key advantage is the scalability of the franchise model. Because the vast majority of new restaurants are opened and operated by franchisees, McDonald’s can expand rapidly without bearing the full cost of building and running each location. Franchisees provide the capital and local expertise, while McDonald’s benefits from additional revenue through royalties and rent. This means that new restaurant openings can contribute to revenue growth without significantly increasing the company’s capital requirements, making expansion both efficient and highly profitable. The geographic mix of new openings also supports long-term growth. A large portion of future restaurant expansion is expected to come from International Developmental Licensed markets, particularly China, where McDonald’s sees significant runway for growth. These markets often have lower current penetration but strong demand for affordable and convenient dining options. As these markets mature, new restaurants can benefit from increasing brand awareness and rising consumer spending, which can drive higher sales over time. Importantly, new restaurant openings have a direct and measurable impact on growth. Management expects net restaurant expansion, combined with recently opened locations, to contribute meaningfully to system-wide sales growth. As new units ramp up and mature, they typically generate higher sales and improve overall system performance. This creates a compounding effect where each year’s openings add to the base for future growth. The company’s disciplined approach to capital allocation further strengthens this investment case. While capital expenditures are increasing to support the higher pace of openings, these investments are targeted and supported by strong expected returns. McDonald’s has consistently indicated that new restaurants meet or exceed its return thresholds, which suggests that expansion is value-accretive rather than growth for its own sake.

Menu innovation is a reason to invest in McDonald's because it allows the company to drive growth from its existing restaurant base by increasing traffic, improving customer satisfaction, and expanding into new categories. While McDonald’s is often associated with its core menu, these products are not static. Management continues to refine, upgrade, and expand them in ways that keep the brand relevant while maintaining the operational efficiency that defines the business model. One of the most important aspects of McDonald’s approach is that innovation is built on top of its existing strengths rather than replacing them. Core products such as burgers, chicken, and beverages remain central to the menu, but they are continuously improved and refreshed. Initiatives such as the rollout of Best Burger, which focuses on making burgers hotter, juicier, and tastier, demonstrate how even small changes to core items can improve customer satisfaction and drive higher sales. These improvements can also streamline operations, making it easier for restaurant staff to deliver consistent quality at scale. Another key driver is the company’s focus on expanding high-growth categories, particularly chicken. The global chicken market is larger than beef and continues to grow faster, which makes it an attractive area for McDonald’s to gain share. Products such as the McCrispy sandwich have already been rolled out across most major markets, and the company continues to test new flavors and formats. By strengthening its position in chicken, McDonald’s can tap into changing consumer preferences while driving incremental traffic. Menu innovation also helps McDonald’s reach different customer segments and occasions. Products like the Big Arch burger target consumers looking for a more premium and filling option, while items such as Snack Wraps appeal to customers seeking convenience or lighter meals. Limited-time offerings and regional innovations create excitement around the menu and encourage repeat visits. Because McDonald’s operates in more than 100 countries, it benefits from a global innovation pipeline where successful products in one market can be scaled to others. Another important advantage is the company’s integrated structure, which combines menu development, supply chain, and operations into a single system. This allows McDonald’s to develop and roll out new products faster than before while ensuring they can be executed efficiently in restaurants. Speed matters in a competitive industry, and the ability to test, refine, and scale products quickly gives McDonald’s an edge over smaller competitors that may lack similar resources. Value also plays a central role in menu strategy. McDonald’s combines product innovation with strong value offerings to drive traffic and volume. Programs such as McValue and Extra Value Meals are designed to reinforce affordability while increasing units sold and improving customer perception of value. This combination of innovation and value is important because it allows the company to attract both price-sensitive customers and those looking for new or improved products. Importantly, menu innovation directly impacts financial performance. Successful product launches can increase traffic, improve average order size, and strengthen margins by driving higher volumes through the system. Management has highlighted that strong menu execution, combined with effective marketing and value positioning, has contributed to positive guest count growth and improved restaurant-level profitability.

New opportunities in beverages are a reason to invest in McDonald's because the category offers a combination of faster growth, high margins, and the ability to drive additional customer visits. While food remains the core of the business, beverages represent one of the largest and most attractive untapped opportunities, with management highlighting a global market worth more than $100 billion. Importantly, beverages are growing faster than the rest of the business, which means they can become a meaningful contributor to both revenue growth and profitability over time. One of the key advantages of beverages is their margin profile. Compared to food, beverages typically have lower input costs and simpler preparation, which allows a larger portion of revenue to translate into profit. This makes beverages particularly attractive from a financial perspective, as even modest increases in beverage sales can have a meaningful impact on overall margins. In addition, beverages often increase the total value of an order, as customers frequently add a drink to an existing meal or visit specifically for a beverage. Another important factor is the ability of beverages to drive frequency and expand dayparts. Unlike core meals, which are often tied to breakfast, lunch, or dinner, beverages can attract customers throughout the day, including in the afternoon and evening when traffic is typically lower. Management has highlighted that new beverage offerings have already driven incremental occasions, particularly outside traditional meal times. This means beverages can increase how often customers visit McDonald’s rather than simply replacing existing purchases. McDonald’s is also well positioned to capture this opportunity by leveraging its existing infrastructure. The company can introduce new beverages within its current restaurant base, using its global scale, supply chain, and operational systems to roll out products quickly and efficiently. Enhancements to the McCafé platform, as well as the introduction of iced coffees, refreshers, energy drinks, and crafted sodas, allow McDonald’s to compete more directly in categories that have traditionally been dominated by coffee chains and specialty beverage players. Early tests of these offerings have exceeded expectations, with strong customer adoption and higher average order values. Another important element is the company’s ability to adapt beverage offerings to local preferences. Because McDonald’s operates globally, it can test new products in different markets and refine them based on customer feedback before scaling them more broadly. This creates a continuous pipeline of innovation and reduces the risk associated with new product launches. Successful formats, flavors, and recipes can be replicated across markets, allowing the company to build momentum over time. Beyond integrating beverages into its core restaurants, McDonald’s is also exploring more dedicated beverage concepts. While still in the early stages, these initiatives are designed to capture a larger share of the growing demand for specialty drinks and snackable occasions. Even if standalone concepts remain limited, the learnings from these tests can be applied to the broader system, improving execution and product development across all restaurants. Importantly, beverages also align well with broader consumer trends. There is increasing demand for specialty coffee, flavored drinks, and customizable beverage options, particularly among younger consumers. By expanding its beverage offerings, McDonald’s can attract new customers and remain relevant in a category that continues to evolve rapidly.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 11,95, which is from the year 2025. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,0% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on McDonald's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $102,03. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy McDonald's at a price of $51,02 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 10.551, and capital expenditures were 3.365. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.356 in our calculations. The tax provision was 2.334. We have 712,2 outstanding shares. Hence, the calculation will be as follows: (10.551 – 2.356 + 2.334) / 712,2 x 10 = $147,84 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With McDonald's free cash flow per share at $10.09 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $115,91.

Conclusion

I believe that McDonald's is an intriguing company with strong management. The company has built a moat through its real estate ownership, global scale and cost advantages, brand strength, franchise model, and digital ecosystem. McDonald’s has consistently achieved a high ROIC, which is a trend that is expected to continue. Free cash flow and free cash flow margins have also consistently been high, and this is expected to continue due to the company’s capital-light and highly efficient business structure. Changing consumer preferences is a risk for McDonald’s because demand is gradually shifting toward healthier, more customizable, and more sustainable food options, which may not fully align with its traditional menu and operating model. Trends such as increased health awareness and the rise of GLP-1 drugs could reduce overall calorie consumption and dining frequency, potentially impacting traffic and long-term growth. Competition is also a risk because McDonald’s operates in a highly competitive market with many alternatives, ranging from traditional fast food to grocery stores and at-home dining. Intense price competition, evolving consumer habits, and strong rivals across multiple categories can pressure both traffic and margins over time. Food safety is another risk because the company’s global scale and complex supply chain make it difficult to fully eliminate the risk of contamination or operational errors. Even isolated incidents can damage consumer trust and negatively impact sales, margins, and brand perception. On the other hand, opening new restaurants is a key reason to invest, as it provides a clear and scalable path to long-term growth driven by strong unit economics and expansion into underpenetrated markets. The franchise model allows McDonald’s to grow efficiently with attractive returns, while new locations add incremental sales and create a compounding effect on system performance. Menu innovation is another reason to invest, as it drives growth from existing restaurants by increasing traffic, improving customer satisfaction, and expanding into high-growth categories. By continuously upgrading its core menu while introducing new products, the company can stay relevant and support higher sales and margins. New opportunities in beverages also strengthen the investment case, as the category offers faster growth, high margins, and the ability to drive additional customer visits throughout the day. By expanding its beverage platform, McDonald’s can increase average order value, attract new occasions, and boost both revenue and profitability over time. Overall, I believe there are many things to like about McDonald’s, and buying shares at the Ten Cap price of $147 could be an attractive long-term investment.

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