McDonald’s Earnings: Raising Fair Value on Resilient Consumer, Development Runway; Shares Expensive

We plan to raise our fair value estimate for wide-moat McDonald’s MCD by a high-single-digit percentage due to resilient comparable-store sales and a near-term uptick in unit growth, but shares continue to look expensive even relative to our revised valuation.

Walking through first-quarter results, the firm posted $5.9 billion in sales and $2.63 in adjusted diluted earnings per share, aligning fairly closely with our own $5.9 billion and $2.52 forecasts, respectively. More importantly, that strength was broad-based, with 12.6% comparable-store sales growth across all segments attesting to both McDonald’s attractive value positioning and secondarily to improving customer satisfaction metrics, collectively driving a mid-single-digit percentage lift in comparable guest count despite traffic declines industrywide. Between a value-focused menu, competitive digital channels (now accounting for 40% of sales in the firm’s top six markets), and a modernized real estate footprint, we believe that McDonald’s is extremely well positioned to outperform its competitive set against a difficult macroeconomic backdrop—underpinning our own forecasts for large, chained operators in our coverage to capture 200 basis points of U.S. market share over the half decade to come.

Our valuation change is attributable to surprisingly durable comparable-store sales momentum and a stronger near-term development outlook. To this effect, we’re raising our 2023 same-store sales forecasts in the U.S., internationally operated, and international licensed segments to 8.2%, 7.5%, and 8.1%, respectively, against prior forecasts of 5.4%, 6.9%, and 4.9%, despite projected softness in the second half of 2023. As it pertains to development, we’re raising our annual net unit growth estimate to 3.9% from 3.7%, with 31% cumulative same-store sales growth relative to the comparable pre-COVID-19 period (7% annualized) earning McDonald’s the right to accelerate growth in underpenetrated international markets.