McDonald's Facing Cyclical, Not Structural, Issues
We're trimming our fair value estimate for McDonald's, but we think the firm's long-term competitive advantages remain intact.
With several other industry players noting a slowdown in U.S. restaurant traffic during second-quarter reporting season,
While we believe McDonald's is in a better spot today than it was a year ago due to efforts to make the company a more nimble and cohesive organization and still remain a solid capital allocation play, the company could be positioned for a more difficult back half to 2016. Additions to the all-day breakfast platform and McPick 2 value platform are positives, but we don't identify a sales driver over the next several months with the same comp sales potential as the initial all-day breakfast launch last year (even with a potential global Pokemon Go promotion or more substantiated loyalty program). Coupled with the aforementioned pricing constraints and wage increases across many global markets, it sets the stage for flat to modest comp declines and more subdued operating margin expansion (and possible margin contraction by the fourth quarter).
Based on a more cautious top-line near-term outlook, we plan to trim our $130 fair value by a few dollars. However, we view the current pressures to be more cyclical than structural in nature and believe our wide moat rating remains intact. While we'd prefer a wider margin of safety, we'd encourage investors to keep this name on their radar screens for additional pullbacks.
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