McDonald's Should Carry Momentum Into 2018
We think the wide-moat firm is now in a place of strength.
Wide-moat
Tax reform gives McDonald's the chance to accelerate aspects of its U.S. velocity growth plan, with plans to invest $6 billion over the next two years (including capital expenditures of $2.4 billion in 2018) in its Experience of the Future restaurant format, which was implemented in 3,000 locations in the U.S. at year-end, with another 4,000 expected in 2018. While these and other technology and labor investments will weigh on near-term margins, we still see a clear path to mid-40s operating margins by 2019-20 through recent refranchising efforts and operating leverage from the aforementioned top-line drivers.
We're planning a moderate increase to our $170 fair value estimate for time value of money adjustments and a lower effective tax rate. While the shares strike us as fairly valued, we don't see many downside catalysts, with new sales levers becoming greater contributors and cash return levels set to accelerate.
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