McValue Menus And Digital Campaigns Will Strengthen Guest Experience

Key Takeaways

• Enhancing value offerings and menu innovation with partnerships aims to attract diverse consumers, boosting sales and foot traffic for revenue growth.
  
• Focus on tech-driven operational efficiency and specialized product verticals is expected to improve margins, market share, and digital engagement profitability.
  
• Economic instability and competitive pressures may impact McDonald's revenue and profitability, necessitating strategic focus on value and market capture to mitigate risks.

Catalysts

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

• McDonald's is focusing on enhancing its value and affordability offerings with initiatives like the Every Day Affordable Price menus and McValue platform, which should help attract the low
• and middle-income consumers and improve guest count, driving revenue growth.
  
• The company is investing in menu innovation with new product launches like McCrispy chicken strips and leveraging partnerships such as the marketing campaign with The Minecraft Movie. This approach is expected to entice customers with novel offerings, thereby boosting sales and margin by increasing foot traffic and encouraging higher spending.
  
• McDonald's is creating a global restaurant experience team to increase its speed in executing innovations and scaling tech and product developments faster. This structural shift is likely aimed at improving operational efficiencies, thus positively impacting net margins through enhanced productivity.
  
• The emphasis on specialized product verticals such as beef, chicken, and beverages, along with targeted marketing and category expertise, will likely help McDonald's increase its market share across these segments, contributing to revenue growth and aiding margin expansion as they develop and promote high-margin offerings.
  
• McDonald's strategy to intensify consumer engagement through innovative digital campaigns and exclusive in-app experiences is intended to drive customer loyalty and frequency of visits, which should elevate overall revenue and earnings as digital channels typically offer higher-margin opportunities.

McDonald's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming McDonald's's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.8% today to 33.7% in 3 years time.
• Analysts expect earnings to reach $10.2 billion (and earnings per share of $15.12) by about May 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 28.9x on those 2028 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Hospitality industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

McDonald's Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainty and geopolitical tensions are affecting consumer sentiment, particularly impacting the financials through potential reductions in revenue as global comp sales have already declined by 1%.
  
• Increased inflationary pressures, especially in key markets like Europe, are raising costs. High single-digit inflation, particularly in beef, can negatively impact net margins and operating income.
  
• The U.S. market is experiencing a clear economic divide, with nearly double-digit declines in QSR traffic from both low
• and middle-income cohorts, posing a risk to revenue growth if McDonald's value proposition does not sufficiently attract these consumers back.
  
• The reliance on promotional campaigns and value platforms such as the McValue menu and $5 Meal Deals may pressure net margins if not effectively balanced with higher-margin offerings, leading to less than optimal profitability.
  
• Intense specialist competition in categories like beverages and chicken requires focused execution and investment, creating a risk of higher operating costs and uncertain ROI if McDonald's does not successfully capture market share in these specific verticals.

Valuation

• The analysts have a consensus price target of $332.008 for McDonald's based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $30.3 billion, earnings will come to $10.2 billion, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $316.79, the analyst price target of $332.01 is 4.6% 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.