McDonald's Set for Market Share Gains
We plan a modest raise to our McDonalds $225 fair value estimate based on more optimistic near-term top and bottom line results and see shares as slightly undervalued.
We believe the key takeaway for wide-moat McDonald's MCD investors coming out of its third-quarter update and 2020 investor day event is that the firm remains well positioned for postpandemic market share gains. Sales trends are unlikely to be linear--evidenced by U.S. October comps returning to mid-single-digit growth after low-double-digit growth in September due to the Travis Scott promotion--but we believe various components of its "Accelerating the Arches" plan position McDonald's to meet (and likely exceed) its 2021-2022 guidance calling for mid-single-digit systemwide sales growth, operating margins in the low-to-mid 40s, annual G&A spend of around 2.3% of system sales (versus 2.2% in 2020), capital expenditure of $2.3 billion, and implied free cash flow of $5.5-$6.0 billion. We also believe McDonald's can sustain systemwide sales growth trends beyond 2022, owing to new comp drivers and international restaurant unit acceleration.
Our confidence is rooted in the three pillars of management's acceleration plan, including: (1) optimized marketing; (2) focus on core menu; and (3) doubling-down on digital, drive-thru, and delivery efforts (referred to as its "MCD" plan). McDonald's core menu news--including a nationwide launch of a premium crispy chicken sandwich in 2020, testing a McPlant burger in some markets next year, and the recent McCafe bakery launch--are grabbing headlines, but we believe greater use of social media and other digital marketing efforts will amplify the opportunity. We also see positives from many digital/drive-thru/delivery strategies, including an overhauled digital loyalty program (MyMcDonald's) increased drive-thru capacity (side-by-side lanes and third windows), and examining hybrid first- and third-party delivery models in some international markets to accelerate adoption.
We plan a modest raise to our $225 fair value estimate based on more optimistic near-term top and bottom line results and see shares as slightly undervalued.
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