McDonald's Margin Compression Sinks Shares After Q4 Results, but Long-Term Narrative Intact

Wide-moat McDonald's long-term road map is intact, but fourth-quarter results and 2023 guidance suggest a protracted recovery to prepandemic profitability. Diluted earnings per share of $2.59 aligned closely with our $2.60 forecast as strong guest traffic offset softer-than-expected margins. The 14.6% U.S. restaurant margin and 17.4% international operated markets margin were 40 and 160 basis points shy of our forecasts, with management's guidance for midteens European inflation in 2023 adding a degree of near-term earnings risk that we'd underestimated. We now project slightly softer earnings growth in 2023, with a full recovery to prepandemic restaurant margins likely stretching out five or six years (2027) as the firm prices at or below inflation to defend guest traffic gains. We expect to lower our $247 fair value estimate by a low-single-digit percentage, roughly consistent with the market's reaction to earnings.