Menu, Operations Improvements Solidify McDonald's Moat
The company delivered a better than expected third quarter, but investors must be aware that tougher comparisons loom.
With the market bracing for soft results in light of sluggish industry trends,
While the third-quarter results reinforce the brand intangible asset behind our wide moat, McDonald's investors must be prepared for U.S. comps to dip into negative territory the next two quarters as it overlaps last year's all-day breakfast launch. That said, we believe there are other drivers that could mitigate these headwinds, including ongoing restaurant-level improvements, the margin benefit of recent refranchising, and the announcement of a new three-year capital return program sometime in the first half of 2017.
We're not planning material changes to our $128 fair value estimate, as the better-than-expected third-quarter results will be offset by a slight reduction to our near-term comp outlook amid limited near-term pricing opportunities. We view shares as undervalued and remain comfortable with our five-year targets calling for 4%-5% annual systemwide sales growth and operating margins in the low 40s (driven by refranchising activity and other operational improvements).
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