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

McDonald’s is one of the most recognized brands in the world, serving nearly 70 million customers daily across more than 100 countries. With a business model built on scale, brand strength, and a highly efficient franchise system, McDonald’s generates stable, recurring income from royalties and rent rather than relying solely on food sales. Former CFO Harry J. Sonneborn once said, “We are not technically in the food business. We are in the real estate business,” highlighting the company’s unique approach to growth and profitability. From its classic core menu to new opportunities in chicken, beverages, and digital engagement, McDonald’s continues to evolve while staying rooted in a proven model. The question is: Does this fast-food giant deserve a place in your portfolio?

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The Business

McDonald's was founded in 1940 and has since grown into the world's largest quick-service restaurant chain, with more than 43.000 restaurants across over 100 countries as of 2024. The vast majority of these locations - around 95% - are franchised, which defines the company’s 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 royalties and rent. The company uses two primary franchise structures. In a conventional franchise, McDonald’s typically owns or leases the land and building, while the franchisee pays for the interior equipment and is responsible for day-to-day operations. McDonald’s receives rent and royalties, usually based on a percentage of sales. In the developmental license or affiliate model, used primarily in international markets, McDonald’s does not invest capital in the restaurants. Instead, the licensee owns the real estate and operates the business, paying royalties and initial fees to McDonald’s. This structure enables the company to expand into diverse markets with minimal capital requirements. In addition to being a restaurant company, McDonald’s is also one of the largest real estate holders globally. This gives it strategic control over key locations and provides a stable, high-margin revenue stream. The business is managed through three segments: the U.S., International Operated Markets, and International Developmental Licensed Markets. McDonald’s competitive moat is built on several enduring advantages. Its brand is among the most recognized in the world, supported by decades of marketing and cultural relevance. Signature items like the Big Mac, Chicken McNuggets, and McFlurry have become billion-dollar brands on their own. The global scale of the company enables cost efficiencies and bargaining power with suppliers, while its standardized systems ensure consistency across thousands of locations. The franchise model is a key strength, allowing McDonald’s to grow without taking on the capital burden of running each restaurant. Franchisees, who are often deeply invested financially and operationally, bring local knowledge and entrepreneurial drive to the business. Meanwhile, McDonald’s collects predictable fees and rent, resulting in a resilient and high-margin business. Owning or controlling the real estate where its restaurants operate further strengthens McDonald’s position. This gives the company leverage over franchisees, helps ensure consistent restaurant quality, and generates rental income that is less volatile than restaurant sales. McDonald’s also stays relevant by adapting to local tastes and innovating its menu offerings, from coffee and breakfast items to plant-based products and regional specialties. It has proven its ability to evolve with changing consumer preferences while maintaining a consistent core identity.

Management

Chris Kempczinski is the President and CEO of McDonald’s Corporation, a role he assumed in 2019 following the departure of former CEO Steve Easterbrook. 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, he oversaw the business operations of approximately 14.000 restaurants and was instrumental in accelerating the company’s customer-centric initiatives. Chris Kempczinski holds a bachelor’s degree from Duke University and an MBA from Harvard Business School. Prior to joining McDonald’s, he held senior leadership roles at several major consumer companies, including Procter & Gamble, PepsiCo, and Kraft Foods, where he gained broad experience in brand management, strategy, and operations across diverse product categories. His early tenure as CEO was marked by extraordinary challenges, including navigating the company through the global COVID-19 pandemic. The second quarter of 2020 proved to be the most difficult in McDonald’s history, yet under his leadership, the company swiftly recovered, returning to pre-pandemic sales levels by the fourth quarter of that same year. During this time, Chris Kempczinski emphasized transparency, agility, and communication - values that were reflected in a 2020 internal survey where 90% of employees reported feeling well supported by leadership. As CEO, he introduced the company’s “Accelerating the Arches” growth strategy, which centers on three pillars: “Maximize our Marketing,” “Commit to the Core,” and “Double Down on the 3Ds” - Digital, Delivery, and Drive Thru. This strategic framework is designed to ensure long-term relevance, operational excellence, and sustained growth in a fast-evolving food service landscape. Known for his detail-oriented and analytical leadership style, Chris Kempczinski is also praised for his willingness to adapt and learn. In interviews, he has shared key leadership lessons from the pandemic, including the importance of overcommunicating during times of uncertainty. When asked about companies he admires, he often cites Amazon for its Day 1 mentality, Nike for brand engagement, and Walmart for its employee-focused culture. Given his combination of consumer brand expertise, strategic clarity, and steady leadership through periods of disruption, Chris Kempczinski is widely seen as the right person to lead McDonald’s into its next era 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 above 10% every year over the past decade, and above 15% in the past nine years, which is high compared to many other consumer-facing businesses. The main reasons for this strong performance are its franchise model and real estate control. About 95% of McDonald’s restaurants are franchised, meaning the company earns royalties and rent with relatively little ongoing capital investment. Franchisees are responsible for day-to-day operations and for covering the cost of equipment, staff, and interior build-out. In addition, McDonald’s often owns or secures long-term leases for its restaurant locations, particularly in conventional franchise agreements. These sites are rented to franchisees at a markup, turning real estate into a profit-generating asset and contributing to a predictable, capital-efficient stream of income. ROIC decreased slightly in 2024, largely due to higher capital expenditures, a modest decline in operating margin, and short-term challenges such as inflationary pressures and an E. coli outbreak in the U.S. Nevertheless, McDonald’s ROIC remains strong, and I expect it will continue to be high going forward, supported by its asset-light, highly efficient business model.

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. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. It is curious that McDonald's has had negative equity since 2016. However, there is a clear explanation for this. Over the past decade, McDonald’s has returned enormous amounts of capital to shareholders, primarily through share repurchases. When the total amount spent on buybacks exceeds the company’s retained earnings, equity can turn negative - especially in capital-light businesses like McDonald’s that don’t need to keep much profit on the balance sheet. To fund these large buybacks and its dividend program, McDonald’s has taken on significant long-term debt. This isn’t unusual for a mature, cash-generating company. In fact, McDonald’s has deliberately increased its use of debt to make its balance sheet more efficient and return excess cash to shareholders. Because McDonald’s runs an asset-light, franchise-based model that generates strong and consistent cash flow, it doesn’t need to retain a lot of capital to grow. Instead of investing heavily in physical assets, the company chooses to return most of its surplus cash to shareholders. That, in turn, reduces the equity shown on the balance sheet. Despite the negative equity, this is not a concern for McDonald’s. As long as the company continues to generate healthy cash flows and manage its debt responsibly, negative equity is simply an accounting outcome of its shareholder-friendly strategy - not a sign of financial weakness.

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. It is not surprising that McDonald's has generated positive free cash flow every year over the past decade. Free cash flow and the levered free cash flow margin decreased in 2024, primarily due to higher capital expenditures. More than half of this spending was directed toward opening new restaurants, particularly in the U.S. and International Operated Markets. Some of the investment was also pulled forward to support the future development pipeline, helping the company stay on track with its long-term growth targets. Looking ahead, McDonald’s expects to increase CapEx further in 2025, with most of it again allocated to new unit growth. The company has indicated that 2025 through 2027 will be peak investment years, driven by large-scale projects in finance systems, people management, indirect sourcing, and data & analytics. These initiatives are expected to deliver meaningful long-term efficiencies, although they will temporarily reduce free cash flow conversion during the peak investment phase. That said, the expected dip in free cash flow over the next couple of years is not a concern, as these investments are designed to support higher free cash flow in the future. The company remains committed to returning all excess free cash flow to investors, so as McDonald’s grows its free cash flow over time, shareholders can anticipate more buybacks and higher dividends. The current free cash flow yield is below the ten-year average, which suggests that the shares are trading at a premium valuation. 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 4,71 years of earnings in debt. This is higher than I would typically like to see, but it’s not unexpected given that McDonald’s has used debt to fund share buybacks. While this level of debt doesn’t stop me from considering an investment in McDonald’s, it is certainly something I will continue to monitor. That said, there are a few reasons why McDonald’s higher debt is less concerning. First, the business model generates stable and predictable cash flows from franchise royalties and rent, which helps ensure it can comfortably cover interest payments -even during economic downturns. Second, with about 95% of its restaurants franchised, McDonald’s runs an asset-light and capital-efficient model. This frees up more cash to manage debt and return capital to shareholders.

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Risks

Macroeconomic conditions are a risk for McDonald’s. The company’s financial performance is significantly influenced by economic trends across its global markets. Factors such as inflation, interest rates, and shifts in consumer confidence can impact both customer behavior and operating costs. In 2024, McDonald’s highlighted that inflationary pressures - particularly in food and packaging - continue to weigh on margins, especially in several European markets. More importantly, inflation and the cost-of-living crisis are directly affecting McDonald’s core customer base. Management has consistently flagged pressure among low-income consumers, particularly in the U.S. and U.K., who are now spending more cautiously. For example, the company has noted a reduction in transaction size among lower-income customers in the U.S., meaning people are still visiting McDonald’s, but buying less. In the U.K., economic pressures on families have led to reduced spending, especially during breakfast hours, where a strong local competitor has intensified pricing competition. These macroeconomic headwinds are not isolated to one region. McDonald’s has seen similar trends across Europe, where both families and low-income households are under financial pressure. As a result, traffic in the quick-service restaurant industry has declined, and the overall restaurant market remains sluggish. Management acknowledged that industry-wide visits in the U.S. were down in 2024, particularly among low-income consumers, who make up a disproportionately large share of fast-food traffic. Looking into 2025, McDonald’s expects continued softness in industry traffic across many of its major markets. While the company still plans to grow its market share, it must do so in the context of a more cautious and value-focused consumer. The combination of high food prices and low consumer confidence may continue to limit discretionary spending, especially among the customer segments that drive a large portion of McDonald’s business.

Competition is a risk for McDonald’s. The company operates primarily in the informal eating out (IEO) segment - a space that is highly competitive and constantly evolving. McDonald’s not only competes with traditional fast food and fast casual chains but also faces growing pressure from non-traditional players, including convenience stores, grocery retailers, coffee shops, and even online meal providers. These competitors are increasingly targeting the same value-conscious, time-strapped consumer with affordable and convenient food options. In recent years, grocery stores in particular have emerged as strong competitors. Management has pointed out that eating at home has become more affordable, partly due to less price volatility in packaged food. As a result, the IEO segment has contracted, especially among low-income consumers who are increasingly choosing to eat at home to save money. This shift is especially relevant in the current inflationary environment, where consumer budgets are under pressure. The competitive risk is also dynamic. McDonald’s results can be affected by new product launches, pricing strategies, or promotional campaigns by rivals, as well as by broader consolidation across the foodservice and delivery sectors. Innovation from competitors, such as improved digital platforms or faster, cheaper delivery options, can also put pressure on McDonald’s to match or exceed expectations. McDonald’s competes on many fronts: product quality, menu variety, pricing, speed, convenience, service, and the overall customer experience. To stay ahead, the company must continually improve its offerings, introduce relevant new products, invest in digital and delivery infrastructure, and maintain operational efficiency - all while responding quickly to the actions of competitors. This is a complex balancing act, and even strategies that succeed in one area can sometimes hurt performance in another. The reality is that McDonald’s cannot control the broader competitive landscape, and there’s no guarantee that its strategies will be successful in every market or economic environment. A more aggressive pricing approach from a competitor, a wave of new fast casual entrants, or a meaningful shift in consumer habits - such as more people cooking at home - could all negatively impact McDonald’s traffic and sales.

Food safety is a risk for McDonald’s. While the company dedicates significant resources to maintaining high food safety standards, its global scale and complex supply chain make it vulnerable to incidents that can damage customer trust and impact financial performance. Even a single food safety event - whether real or perceived - can lead to negative headlines, a loss of consumer confidence, and lower sales. This risk materialized in 2024, when an E. coli outbreak in the U.S. was linked to slivered onions used in Quarter Pounders. As a result, McDonald’s U.S. sales declined. The Quarter Pounder is one of the company’s most profitable items, so the drop had a disproportionate impact on margins. To regain momentum and rebuild trust, McDonald’s responded with value-focused promotions and digital offers aimed at bringing customers back. Management was quick to reiterate that food safety remains their top priority, emphasizing that the strength of the brand depends on maintaining the absolute trust of customers. Even with robust controls in place, food safety issues can still emerge - from suppliers, in-store operations, or third-party delivery channels. These events can lead to operational disruptions, legal and recall costs, and long-term reputational harm. In today’s digital age, even a localized issue can quickly gain global attention through social media, amplifying concerns and prolonging negative sentiment. Beyond the immediate financial impact, food safety concerns can influence how consumers perceive the overall quality and reliability of the brand. A decline in trust can reduce customer traffic, weaken brand loyalty, and push consumers toward competitors seen as safer or more transparent. Given McDonald’s scale and visibility, even isolated incidents have the potential to ripple across regions.

Reasons to invest

Opening new restaurants is a reason to invest in McDonald’s. In 2024, the company successfully met its global development targets and remains on track to reach 50.000 restaurants by the end of 2027, a major milestone in its long-term growth strategy. For 2025, McDonald’s plans to open more restaurants globally, with a strong focus on the U.S., International Operated Markets, and particularly International Developmental Licensed markets, including around 1.000 new restaurants in China alone. This expansion is expected to contribute over 2 percent to system-wide sales growth in 2025, driven by both the new openings and the momentum from 2024 additions. The company anticipates approximately 1.800 net new restaurants in 2025, translating to a unit growth rate of just over 4 percent. This is a meaningful driver of long-term revenue growth, especially since most of the new restaurants are freestanding drive-thru locations, which tend to ramp up volumes over time and generate attractive returns. What makes this expansion particularly compelling is that McDonald’s isn’t simply chasing growth for its own sake. It is focused on quality and strategic placement. Management has invested significant effort into identifying the right locations and building a robust development pipeline. New restaurants are reportedly performing well, with first-year returns in the low-to-mid teens - solid by industry standards. As these locations mature and build awareness in their local markets, sales typically increase, creating additional upside. McDonald’s growth is also supported by its franchise model, which enables rapid expansion without requiring the company to bear the full capital or operational burden of each restaurant. The recent renewal of major franchise agreements, such as the one with Arcos Dorados in Latin America, highlights the strength and stability of these partnerships. Franchisees bring local expertise and capital, while McDonald’s provides the brand, systems, and ongoing support, making for an efficient and scalable growth engine.

A strong portfolio is a reason to invest in McDonald’s. Management frequently emphasizes that its core offerings remain at the heart of the business, and recent initiatives show just how much growth potential still exists within this foundation. These are not just legacy items - they are powerful drivers of traffic, customer loyalty, and margin expansion when paired with innovation and marketing. In particular, McDonald’s sees significant long-term opportunity in its chicken portfolio. McCrispy is now available in over 70 markets and is expected to reach nearly all markets by the end of 2025. Meanwhile, items like the Chicken Big Mac and the upcoming return of Snack Wraps are generating renewed excitement and have already helped McDonald’s grow chicken market share in key regions such as France and the U.S. The company is targeting another full point of global chicken market share gain by the end of 2026. At the same time, the burger category is seeing its own refresh. The Best Burger platform, which focuses on improving burger quality, is now in over 80 countries and will be implemented in nearly all markets by the end of 2026. Early results are encouraging, and management is particularly optimistic about the rollout of the Big Arch - a new, larger burger currently being tested in Portugal, Germany, and Canada. These initiatives aim to elevate the experience around classic items while increasing both traffic and average check sizes. Value remains another key strength within the core portfolio. In the U.S., the McValue platform has gained traction with offers like the $5 meal deal and the “buy one, add one for $1” promotion. These deals not only appeal to value-conscious consumers but also encourage upselling. Management has noted that the $5 meal deal often results in average checks of over $10, showing that customers are adding more than just the base offer. Margin performance on these promotions has also been strong, and customer response has been positive. The flexibility built into these value platforms gives customers control over their orders, which improves perceived value while maintaining operational efficiency.

New opportunities in beverages are a reason to invest in McDonald’s. Management has expressed strong confidence in the long-term growth potential of the beverage category, viewing it as one of the most promising areas for expansion. Beverages, including hot and iced coffee, refreshers, and even energy drinks, are growing at roughly twice the pace of the rest of the business and tend to offer very attractive margins. This makes beverages a compelling avenue for increasing both revenue and profitability. McDonald’s is pursuing this opportunity in multiple ways. One approach is optimizing beverage offerings within existing restaurants. This includes enhancing the coffee platform, improving execution around iced and specialty beverages, and testing new product categories such as refreshers and flavored drinks. These additions are aligned with shifting consumer preferences, especially among younger customers who are increasingly choosing specialty beverages over traditional soft drinks. At the same time, McDonald’s is exploring a more ambitious concept through CosMc’s, a new small-format, drive-thru-focused brand centered on beverages and snackable food. While still in the early stages, initial tests in Texas have offered valuable insights. Smaller standalone units with drive-thrus are showing stronger performance than other formats, such as end-cap locations without drive-thrus. As a result, the company is adjusting its mix of test locations - closing some, opening others - and continuing to refine its approach based on early learnings. The vision behind CosMc’s is to capture a different consumption occasion: afternoon pick-me-ups, sweet treats, and specialty drinks. It is designed to complement McDonald’s existing operations while tapping into a growing segment of demand. The company is still evaluating how much of this opportunity should be addressed through new standalone units like CosMc’s, and how much can be captured by enhancing beverage offerings in its core restaurants. Either way, management is clearly committed to making beverages a more prominent part of its long-term growth strategy. Beyond new formats, beverages also support McDonald’s broader strategic goals. They drive frequency by encouraging additional visits throughout the day, particularly in the afternoon when traffic tends to slow. They also support margin expansion, given the relatively low cost of beverage ingredients compared to food.

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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 11,39, which is from the year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 7,8% 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 $97,25. 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 $48,63 (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 9.447, and capital expenditures were 2.775. 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 1.943 in our calculations. The tax provision was 2.121. We have 716,6 outstanding shares. Hence, the calculation will be as follows: (9.447 – 1.943 + 2.121) / 716,6 x 10 = $134,31 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 $9,31 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $106,95.

Conclusion

McDonald's is an intriguing company with good management. The company has built a moat through its brand, global scale, and franchise model. It has consistently achieved a high ROIC and is expected to continue doing so in the future. Both ROIC and free cash flow decreased in 2024 due to higher capital expenditures. However, these investments should lead to higher ROIC and free cash flow in the future, which will benefit investors as the company is committed to returning all excess free cash flow through buybacks and dividends. Macroeconomic conditions are a risk for McDonald’s because inflation, rising costs, and low consumer confidence - especially among lower-income households - are pressuring customer spending and reducing average transaction sizes. These headwinds have led to slower traffic in key markets like the U.S. and Europe, and management expects these trends to persist into 2025. Competition is a risk for McDonald’s because it operates in a crowded and fast-changing market, where it faces pressure not only from traditional rivals but also from grocery stores, convenience outlets, and digital food platforms. Food safety is a risk for McDonald’s because even a single incident can damage customer trust, hurt sales, and impact margins, as seen during the 2024 E. coli outbreak linked to Quarter Pounders. Despite strong safety protocols, McDonald’s global scale and complex supply chain mean that isolated events can quickly escalate and cause lasting reputational harm. Opening new restaurants is a reason to invest in McDonald’s because it drives long-term revenue growth through carefully planned global expansion. With strong unit economics, strategic site selection, and a franchise model that supports efficient scaling, these openings are set to boost system-wide sales while generating attractive returns. A strong portfolio is a reason to invest in McDonald’s because its core menu continues to drive traffic, loyalty, and margins, while new offerings in chicken, burgers, and value platforms are expanding market share and boosting average check sizes. With innovation layered onto familiar favorites, McDonald’s is strengthening its brand and growing sales without needing to reinvent its identity. New opportunities in beverages are a reason to invest in McDonald’s because the category is growing twice as fast as the rest of the business and offers strong margins, making it a high-potential driver of both revenue and profitability. Through upgrades to its core beverage lineup and the development of new concepts like CosMc’s, McDonald’s is positioning itself to capture more dayparts and meet evolving consumer preferences. I believe there are many things to like about McDonald's, and buying shares at $201 - which represents a 25 percent discount to the intrinsic value based on the Ten Cap price - would be a good long-term investment.

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