After a Tough Year, McDonald's Shares Look Compelling

Despite a resurgence in COVID-19 cases that caused global same-store sales to decline in November and December after growth in October, we think shares of wide-moat McDonald's MCD offer investors an attractive risk-reward proposition at current prices. Having incorporated 2020 fourth-quarter results, we maintain our $236 per share fair value estimate, as we remain committed to our long-term expectations for mid-single-digit annual sales growth and modestly expanding operating margins through 2029. Further, we see lasting impacts from the pandemic that should benefit McDonald's, such as an accelerated shift to digital and delivery orders, which carry higher ticket values, and the likelihood that many small-scale competitors will remain permanently closed. McDonald's fourth-quarter same-store sales were up 5.5%, down 7.4%, and down 3.6% in the U.S., international operated markets, and international developmental licensed segments, respectively. We had forecast 5.5% growth, a 3% decline, and a 5% decline for these segments. In the U.S., all dayparts experienced growth, even hardest-hit breakfast which benefited from the successful launch of the McCafé bakery line. However, sales in international markets were hampered by fewer units with drive-thru capabilities and government-imposed restrictions on hours of operation. McDonald's fourth-quarter operating margin fell 470 basis points to 37.7%, compared with our 39.8% estimate, due to sales deleverage and a bump in marketing investments. However, its fiscal 2021 guidance for low-double-digit systemwide sales growth and a low- to mid-40% operating margin aligns with our expectations for 11.5% growth and a 43% margin, although the speed of vaccine rollouts and the return of normal conditions in international operated markets are the most sensitive variable moving forward.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.