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

Opdateret: 3. feb.


Former McDonald's CFO Harry J. Sonneborn is quoted as saying, "We are not technically in the food business." "We are in the real estate business," when explaining the business of McDonald's. While McDonald's current CEO, Chris Kempczinski, has said, "We are in the business of selling a brand so that others can sell burgers and fries." Thus, seeing McDonald's as just a burger and fries restaurant doesn't give you the right idea of the business. In this analysis, I will investigate the company and determine if now is the time to buy the stock.


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.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in McDonald's. If you would like to view the stocks in my portfolio or if you are interested in copying my portfolio, you can find instructions on how to do so here. I don't own any stocks in any competitors of McDonald's either. I have a small investment in Beyond Meat, which is collaborating with McDonald's to create the McPlant burger. However, I wouldn't consider myself heavily involved or invested in McDonald's. As always, I will keep this analysis unbiased. If you want to purchase shares or fractional shares of Procter & Gamble, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.



McDonald's was founded in California, USA in 1940, and it all started with one restaurant. They now have around 40.000 restaurants in 119 different countries. Since their foundation the business has changed, as only few (5 %) of the restaurants are owned by McDonald's, while the rest are franchised. To fully understand the business of McDonald's, you need to understand that there are two different ways that the restaurants can be franchised. The first is conventional franchise, where McDonald's owns or secures a long-term lease on the land, and builds the restaurant, while the franchise pays for equipment, signs, seating, and décor. Once the conventional franchise is running, McDonald's receive fees from the franchise that depends on various factors. The second option is a development license or affiliate agreement, where McDonald's does not invest any capital but receives initial fees and royalties based on sales. The business structure of McDonald's mean that they are not only the largest restaurant chain in the world, but it is also among the largest real estate companies in the world. With the multitude of restaurants worldwide and its highly recognizable brand, it is evidentthat McDonald's possesses a substantial brand moat. CEO Chris Kempczinski has further elaborated on their brand strengths as he mentioned that the Big Mac, McNuggets and McFlurry are bllion dollar brands in their own right. They also have a currency comparison tool named after them, as The Economist invented The Big Mac index in 1986.


Their CEO is Chris Kempczinski. He joined McDonald's global strategy team in 2015 and was promoted to President of McDonald's USA in just one year and one month. He became CEO of McDonald's in 2019, as the former CEO, Steve Easterbrook, was being removed from his position. He has a bachelor's degree from Duke University and an MBA from Harvard Business School. Prior to joining McDonald's, he held positions at Proctor & Gamble, PepsiCo, and Kraft Foods. He faced a challenging start with the sudden departure of the previous CEO and the onset of a pandemic shortly after. Thesecond quarter of 2020 was the worst quarter in McDonald's history, but it did not deter Chris Kempczinski. By the fourth quarter of 2020, they had fully recovered their sales to match those of the fourth quarter of 2019. Since he became CEO, he hasdrafted a growth strategy called MCD. M stands for "Maximize our Marketing," C stands for "Commit to the Core," and D stands for "Double Down on the Three Ds" (Digital, Delivery, and Drive Thru). This strategy is believed to lead to long-term growth for McDonald's. He is known to be a very detailed and analytics-oriented executive, which may be aproblem in such as broad leadership role. However, I read an interview with him, and I liked some the things he has learned through the pandemic, one thing he mention is that there is no such thing as over communicating, and in a survey in the end of 2020, 90 % of employees said they felt well supported by the leadership during the pandemic, which is great numbers. When asked if there are any companies he admire, he mentions Amazon for their Day 1 orientation, Nike forengaging their customers and keeping the brand relevant, and Walmart that is engaged with their associates to addressquestions about the corporate brand. All in all, I feel confident that Chris Kempczinski is the right person to drive McDonald's forward.


I believe that McDonalds has a strong brand moat. And I feel confident that Chris Kempczinski is the right person to continue McDonald's growth. Now let us investigate the numbers to see if McDonald's does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.


The first number we will investigate is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. These numbers are certainly encouraging. Well above 10% in all years, they even managed to deliver a ROIC (Return on Invested Capital) above 10% during 2020, a year when most countries experienced periods of lockdowns. It seems like ROIC peaked in 2018 and has since slightly decreased,but as the ROIC is still above 10%, it isn't a concern for me. However, it will be something that I would monitor moving forward, as I would like to see ROIC grow.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. It is curious that McDonald's has had a negative book value since 2017. The reason for this is that McDonald's has utilized debt to repurchase shares. It might make sense if the stock is significantly undervalued and the debt has a low interest rate. However, I personally prefer to see a company reduce itsdebt, and I'm uncertain about my opinion on this strategy. It is good to see that the book value has been improving recently.



Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. McDonald's consistently generates a positive free cash flow each year, which is always a positive sign. It is also encouraging that they have delivered higher free cash flow than in later years, starting from 2019. Levered free cash flow has also increased, which is nice to see. However, the free cash flow yield suggests that McDonald's is trading at a premium. However, we will discuss this further later on..



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings.Doing the calculation on McDonald's, I can see that McDonald's has 5,81 years of earnings in debt. It is more than I would like to see, but not surprisingly, as McDonald's has used debt to buy back shares. While it won't prevent me from investing in McDonald's, it isn't necessarily something that particularly like.



Based on my preliminary findings, I believe that McDonald's is an intriguing company. However, no investments are without risk, and McDonald's also has some risks. One risk is macroeconomics. In their 2022 fourth quarter earnings call,management mentioned that they expect to face continued macroeconomic headwinds in 2023. They mentioned that macroeconomic-related pressures will weigh on both their customers and their business. They mentioned that significant inflationary headwinds across commodities, labor, and utilities. As a result, they expect their operating margin to be lower in 2023 compared to 2022. McDonald's has increased prices on their products, but it doesn't fully cover the inflationary pressures that McDonald's faces. Another risk is competition. In its annual report, McDonald's mentions that it faces intense competition that could harm its business. McDonald's primarily competes in the informal eating out (IEO) segment, which is highly competitive. Management believes that the segment will continue to be highly competitive for years to come, and McDonald's will need to continue to execute in order to avoid losing market share. Finally, a strong U.S. dollar is also a risk. McDonald's makes most of its revenue outside of the United States (approximately 59%) but reports in U.S. dollars. Hence, foreign exchange will affect the results of McDonald's as long as the U.S. dollar remains strong. In 2023, McDonald's reported a decline in sales of -1,4% year over year at $5,927 billionHowever, when adjusted for constant currency, sales actually increased by 5%. Management expects that the strong dollar will also have a negative impact on the results in the first quarter of 2023 but anticipates improvement throughout the year.


McDonald's also has a lot of potential for growth. I have already written about the growth strategy of MCD. In "Maximizing Marketing," they mention their desire to use marketing to stay relevant. However, prior to Chris Kempczinski becoming CEO, the company had been stuck in a traditional approach. Instead, they stated during campaigns with Travis Scott and J. Balvin that have paid off in a big way. While they will also start using social media more to get instant consumer feedback, meaning they are in constant iteration mode.In "Committing to the Core," management mention their intention to focus on their core business, as they believe it will lead to long-term growth. They emphasize the importance of understanding their customers' preferences. They also mention that they see a significant opportunity in growing their McCafe brand. Management does not provide a specific figure on the potential for growth in the McCafe brand, but it is known that the coffee industry typically offers high profit margins.In "Doubling Down on the Three D's," they mention several ways they can continue to grow. They believe they can be more efficient in the drive-thru, as they work with more technology. Right now, the drive-thru service time is 30 seconds, and they believe that technology can reduce it, allowing them to serve more people in a shorter amount of time. One wayto do this is through their new loyalty program called MyMcDonald's. It is a McDonald's ecosystem where customers can order food, receive delivery, and make payments, all while earning rewards in return. It will also provide McDonald's witha lot of customer data to enhance their business in the future. They also believe that delivery will be a significant driver ofgrowth in the future. During their earnings call, they mentioned leveraging their scale to gain a competitive edge overtheir delivery providers. Development. McDonald's has since added another "D" to their growth strategy, and the "D" stands for development.McDonald's is now constructing new units at a faster rate than they have historically. McDonald's plans to open approximately 1.900 new restaurants in 2023. Out of these, 400 will be located in the United States, and 900 will be in China. Management expects that the restaurants opened in 2022 and 2023 will contribute to a 1,5 % sales growth by the end of 2023. Hence, development should increase sales in the future.



All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here.I chose an estimated future EPS growth rate of 10% (which is the estimated growth rate at Finbox), an estimated future PE of 20 (which is double the growth rate, as the historical PE for McDonald's has been higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we arrive at the sticker price (also known as fair value or intrinsic value) of $106,81. We want to have a margin of safety of 50%, we will divide it by 2. This means that we want to buy McDonald's at a price of $53,41 (or lower of course), if we use the Margin of Safety price.


Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 7.386,7 The capital expenditures were 1.899,2. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 1.329,4 in our further calculations. The tax provision was 1.648. We have 731,3 outstanding shares. Hence, the calculation will be as follows: (7.386,7 - 1.329,4 + 1.648) / 731,3 x 10 = $105,36 in Ten Cap price.


The final calculation is the Payback Time. I also described in "MY STRATEGY". With McDonald's Free Cash Flow Per Share at 7,49 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $94,22.


McDonald's is an interesting company with a strong brand moat. I also feel quite confident in the management. Macroeconomics will impact McDonald's, but the question is to what extent and for how long. Their business model should also shield them from some of the impact, which is nice. I like their growth strategy, which focuses on leveraging their strengths, enhancing customer service, and potentially reducing costs through automation. I really don't like that management has used debt to repurcahse shares. It is also worth noting that McDonald's has outperformed the S&P 500 over the last 5 years. If you had invested $100 in McDonald's in 2017, it would have turned into $172 compared to $157 if you had invested in the S&P 500. I believe that McDonald's has the potential to continue slightly outperforming the S&P 500. Nonetheless, I would need a 50% discount to the intrinsic value in order to consider investing in McDonald's. It means that I will not invest in McDonald's unless it reaches the Ten Cap price of $105,36.


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