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We're Optimistic About McDonald's Recovery

We are not making any changes to our fair value estimate and view shares for the wide-moat company as undervalued.

McDonald's MCD second-quarter-to-date sales update offered signs of recovery across its various markets but also lagged some peers due to its daypart and geographic mix. McDonald's U.S. comps improved from negative 19.2% in April to negative 5.1% in May, which trails some non-pizza quick-service operators (flat to slight comp declines) but is likely explained by exposure to the morning daypart and the loss of morning commuters. The international operated segment--where comps improved from negative 66.7% in April to negative 40.5% in May--continues to be hampered by restaurant closures in key markets (U.K. and France), partly offset by drive-thru strength in markets further along the reopening process. International developmental licensed segment comps improved from negative 32.3% in April to negative 20.0% in May, reflecting restaurant closures (notably Latin America), negative comps in China, but positive comps in Japan. For 2020, we expect a mid-single-digit decline in U.S. comps (a shade better than our previous outlook), mid-teens decline in IO comps (no change), and low to mid-teens decline in IDL comps (worse than previous expectations due to the extended store closures).

McDonald's sales trends generally reflect the operating restrictions and business mix in its various markets, but we're encouraged by its franchisee recovery acceleration investment plan. On top of previously announced rent/royalty cash deferrals, McDonald's said it will invest $200 million in marketing support in the U.S. and IO markets and offer "targeted financial support" to franchisees most negatively affected as well as additional delivery support in certain cases. These investments will weigh on near-term profitability but are important to maintain the health of the franchisee system (a consideration behind our wide moat rating).

The adjustments to our model for sales trends and franchisee investments will not change our $205 fair value estimate, and we see the shares as 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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