Competition Hits McDonald's U.S. Comps
Our fair value estimate for the wide-moat firm remains intact, and shares are modestly undervalued.
With wide-moat McDonald's (MCD) U.S. comps falling just short of expectations (4.8% versus 5.2% consensus), there are two questions investors should be asking: Do softer industry trends reflect competitive or macro trends? And does McDonald’s have enough left with its velocity drivers (Experience of the Future, digital, and delivery), new drive-thru technologies, and product initiatives to reignite growth in 2020?
On the first question, McDonald's cited competitive pressures from mid-August to mid-September, roughly when rivals launched new chicken and plant-based products. However, this reportedly normalized as the quarter ended, suggesting a temporary disruption. Admittedly, some quick-service restaurants and fast-casual chains have walked back their full-year guidance the past few weeks, but we still see McDonald's as well positioned during a potential economic downturn because of its value positioning.
On the second question, the firm said that it is still seeing average ticket benefit from its EOTF format (rolled out at 9,000 U.S. locations), digital initiatives, and delivery (expected to be a $4 billion business in 2019, roughly 4% of system sales). We think these initiatives still have legs and can contribute at least 2 comp points in 2020. But the market may be underestimating McDonald's opportunity to redefine the drive-thru experience for the category through the recently acquired Dynamic Yield (predictive ordering) and Apprente (voice), with both ticket and throughput benefits. McDonald's interest in plant-based products is also palatable, and we would expect a larger pilot beyond the Ontario market in 2020, including U.S. markets.
Taken together, we believe U.S. comps can remain 4%-5% for at least the next two years. While we're planning some modest capital expenditure and selling, general, and administrative adjustments for technology initiatives, our $215 fair value estimate remains intact, and shares are modestly undervalued.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.