'Accelerating The Arches' Strategy Will Strengthen Market Presence And Customer Engagement

Key Takeaways

• Strategic focus on value and innovative offerings expected to drive revenue growth through improved market presence and customer engagement.
  
• Expanding restaurant presence and digital initiatives aimed at higher average checks likely to boost sales, enhance margins, and stabilize revenue growth.
  
• Multiple challenges, including health scares, economic pressures, competition, currency issues, and financial constraints, could adversely impact McDonald's revenue growth and financial performance.

Catalysts

Owns, operates, and franchises restaurants under the McDonald’s brand in the United States and internationally.

• The Accelerating the Arches strategy focusing on value and full margin food innovation is anticipated to drive future revenue growth, as McDonald's plans to enhance its market presence and customer engagement through strategic pricing and innovative offerings.
  
• Recovery from the E. coli incident is expected to improve U.S. sales performance, contributing to revenue stabilization and growth as the brand regains consumer trust by the beginning of Q2 2025.
  
• Deployment of strategic technology platforms aimed at the consumer, restaurant, and company levels is set to improve operational efficiency and enhance customer experiences, potentially leading to increased revenue and better net margins.
  
• Expansion through new restaurant openings in key growth areas such as the U.S. and International Operated Markets is projected to contribute to system-wide sales growth, positively impacting top-line revenue and operating margins.
  
• Continued focus on digital growth and consumer engagement through loyalty programs is anticipated to drive higher average checks and increase repeat visits, boosting revenue and potentially enhancing overall earnings due to more profitable transactions.

McDonald's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming McDonald's's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.7% today to 33.4% in 3 years time.
• Analysts expect earnings to reach $10.0 billion (and earnings per share of $14.64) by about March 2028, up from $8.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2028 earnings, up from 27.9x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

McDonald's Future Earnings Per Share Growth

Risks

• The E. coli outbreak linked to slivered onions negatively impacted the U.S. sales, which could lead to ongoing consumer trust issues and adversely affect future revenue growth if not fully addressed.
  
• Pressure on spending, particularly among low-income consumers and families, could lead to decreased sales and negatively affect overall revenue and net margins, especially in key markets like the U.S. and U.K.
  
• The increased competition in the QSR industry, especially from aggressive local competitors in markets like the U.K., could affect McDonald's market share and revenue growth.
  
• Currency headwinds, particularly due to a strong U.S. dollar, are expected to continue into 2025, which may negatively impact earnings per share.
  
• Higher capital expenditures and increasing interest expenses, coupled with lower-than-expected free cash flow conversion, may pressure net margins and affect overall financial performance.

Valuation

• The analysts have a consensus price target of $328.362 for McDonald's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $360.0, and the most bearish reporting a price target of just $280.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.8 billion, earnings will come to $10.0 billion, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $321.29, the analyst price target of $328.36 is 2.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.