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McDonald's Facing Cyclical, Not Structural, Issues

We're trimming our fair value estimate for McDonald's, but we think the firm's long-term competitive advantages remain intact.

With several other industry players noting a slowdown in U.S. restaurant traffic during second-quarter reporting season,

While we believe McDonald's is in a better spot today than it was a year ago due to efforts to make the company a more nimble and cohesive organization and still remain a solid capital allocation play, the company could be positioned for a more difficult back half to 2016. Additions to the all-day breakfast platform and McPick 2 value platform are positives, but we don't identify a sales driver over the next several months with the same comp sales potential as the initial all-day breakfast launch last year (even with a potential global Pokemon Go promotion or more substantiated loyalty program). Coupled with the aforementioned pricing constraints and wage increases across many global markets, it sets the stage for flat to modest comp declines and more subdued operating margin expansion (and possible margin contraction by the fourth quarter).

Based on a more cautious top-line near-term outlook, we plan to trim our $130 fair value by a few dollars. However, we view the current pressures to be more cyclical than structural in nature and believe our wide moat rating remains intact. While we'd prefer a wider margin of safety, we'd encourage investors to keep this name on their radar screens for additional pullbacks.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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