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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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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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