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Category: Mcdonalds and Stock Market
Last updated: 5 June 2020 Stock price: $193.24 On this page we will look to provide more details about Mcdonalds, one of the worlds largest fast food franchises with revenue topping $21 billion in their 2019 fiscal year and 38 695 stores across the world.
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About Mcdonalds
The Company franchises and operates McDonald’s restaurants, which serve a locally-relevant menu of quality food and beverages in 119 countries. Of the 38,695 restaurants at year-end 2019, 36,059 were franchised, which is 93% of McDonald's restaurants. McDonald’s franchised restaurants are owned and operated under one of the following structures - conventional franchise, developmental license or affiliate.
The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting the McDonald’s brand. The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources. Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. Conventional Franchise Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor.
The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry. Franchisees are also responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants. McDonald's Corporation 2019 Annual Report 4 The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to facilitate consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. This structure enables McDonald’s to generate significant and predictable levels of cash flow. Developmental License or Affiliate Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants.
The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license. While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates
The optimal ownership structure for an individual restaurant, trading area or market (country) is based on a variety of factors, including the availability of individuals with the entrepreneurial experience and financial resources, as well as the local legal and regulatory environment in critical areas such as property ownership and franchising. The business relationship between McDonald’s and its independent franchisees is supported by adhering to standards and policies and is of fundamental importance to overall performance and to protecting the McDonald’s brand. The Company is primarily a franchisor and believes franchising is paramount to delivering great-tasting food, locally relevant customer experiences and driving profitability. Franchising enables an individual to be their own employer and maintain control over all employment related matters, marketing and pricing decisions, while also benefiting from the strength of McDonald’s global brand, operating system and financial resources. Directly operating McDonald’s restaurants contributes significantly to our ability to act as a credible franchisor. One of the strengths of the franchising model is that the expertise from operating Company-owned restaurants allows McDonald’s to improve the operations and success of all restaurants while innovations from franchisees can be tested and, when viable, efficiently implemented across relevant restaurants. Having Company-owned and operated restaurants provides Company personnel with a venue for restaurant operations training experience. In addition, in our Company-owned and operated restaurants, and in collaboration with franchisees, we are able to further develop and refine operating standards, marketing concepts and product and pricing strategies that will ultimately benefit McDonald’s restaurants.
The Company’s revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms. Conventional Franchise Under a conventional franchise arrangement, the Company generally owns or secures a long-term lease on the land and building for the restaurant location and the franchisee pays for equipment, signs, seating and décor.
The Company believes that ownership of real estate, combined with the co-investment by franchisees, enables us to achieve restaurant performance levels that are among the highest in the industry. Franchisees are also responsible for reinvesting capital in their businesses over time. In addition, to accelerate implementation of certain initiatives, the Company may co-invest with franchisees to fund improvements to their restaurants or their operating systems. These investments, developed in collaboration with franchisees, are designed to cater to consumer preferences, improve local business performance, and increase the value of our brand through the development of modernized, more attractive and higher revenue generating restaurants. McDonald's Corporation 2019 Annual Report 4 The Company requires franchisees to meet rigorous standards and generally does not work with passive investors. The business relationship with franchisees is designed to facilitate consistency and high quality at all McDonald’s restaurants. Conventional franchisees contribute to the Company’s revenue, primarily through the payment of rent and royalties based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise. This structure enables McDonald’s to generate significant and predictable levels of cash flow. Developmental License or Affiliate Under a developmental license or affiliate arrangement, licensees are responsible for operating and managing the business, providing capital (including the real estate interest) and developing and opening new restaurants.
The Company generally does not invest any capital under a developmental license or affiliate arrangement, and it receives a royalty based on a percent of sales, and generally receives initial fees upon the opening of a new restaurant or grant of a new license. While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates
Quick facts about Mcdonalds
- Mcdonalds is listed on the New York Stock Exchange under share code ticker: MCD
- Market capital of Mcdonalds: $147.809 billion
- Number of Mcdonalds restaurants: 38 695
- Number of employees: 205 000
- Revenues in 2019: $21.07 billion
- Earnings per share in 2019: $7.88
- Dividends paid per share in 2019: $4.73
- Number of Mcdonalds shares in issue: 764.9 million
- Cash on balance sheet: $898.5 million
Segmental revenue of Mcdonalds
The summary below shows the revenues for Mcdonalds during 2019 by segment (in $ millions)
- U.S.: $ 7.842
- International Operated Markets: 11.398
- International Developmental Licensed Markets & Corporate: 1.835
- Total revenues: $ 21.076
Products of Mcdonalds
McDonald’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, McDonald's Fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. McDonald’s restaurants in the U.S. and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes. In addition to these menu items, the restaurants sell a variety of other products during limited-time promotions. Taste, quality, choice and nutrition are important to our customers, and we are continuously evolving our menu to meet our customers' needs, including testing new products on an ongoing basis.
Competition of Mcdonalds
McDonald’s restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience, service, experience, menu variety and product quality in a highly fragmented global restaurant industry. McDonald's Corporation 2019 Annual Report 5 In measuring the Company’s competitive position, management reviews data compiled by Euromonitor International, a leading source of market data with respect to the global restaurant industry.
The Company’s primary competition, which is referred to as the informal eating out ("IEO") segment, includes the following restaurant categories defined by Euromonitor International: limited-service restaurants (which combines quick-service eating establishments and 100% home delivery/takeaway providers), street stalls or kiosks, cafés, specialist coffee shops, self-service cafeterias and juice/smoothie bars. The IEO segment excludes establishments that primarily serve alcohol and fullservice restaurants other than providers with limited table service.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 9 million outlets and generated $1.2 trillion in annual sales in 2018, the most recent year for which data is available. McDonald’s Systemwide 2018 restaurant business accounted for 0.4% of those outlets and 8.2% of the sales. Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 20 million outlets and generated $2.7 trillion in annual sales in 2018. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.6% of the sales.
The Company’s primary competition, which is referred to as the informal eating out ("IEO") segment, includes the following restaurant categories defined by Euromonitor International: limited-service restaurants (which combines quick-service eating establishments and 100% home delivery/takeaway providers), street stalls or kiosks, cafés, specialist coffee shops, self-service cafeterias and juice/smoothie bars. The IEO segment excludes establishments that primarily serve alcohol and fullservice restaurants other than providers with limited table service.
Based on data from Euromonitor International, the global IEO segment was composed of approximately 9 million outlets and generated $1.2 trillion in annual sales in 2018, the most recent year for which data is available. McDonald’s Systemwide 2018 restaurant business accounted for 0.4% of those outlets and 8.2% of the sales. Management also on occasion benchmarks McDonald’s against the entire restaurant industry, including the IEO segment defined above and all full-service restaurants. Based on data from Euromonitor International, the restaurant industry was composed of approximately 20 million outlets and generated $2.7 trillion in annual sales in 2018. McDonald’s Systemwide restaurant business accounted for 0.2% of those outlets and 3.6% of the sales.
Marketing of Mcdonalds
McDonald’s global brand is well known. Marketing, promotional and public relations activities are designed to promote McDonald’s brand and differentiate the Company from competitors. Marketing and promotional efforts focus on value, quality, food taste, menu choice, nutrition, convenience and the customer experience.
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions):
Advertising costs included in operating expenses of Company-operated restaurants primarily consist of contributions to advertising cooperatives and were (in millions):
- 2019: $365.8 million
- 2018: $388.8 million
- 2017: $532.9 million
Strategic direction of Mcdonalds
The Velocity Growth Plan, the Company’s customer-centric strategy, is rooted in extensive customer research and insights, along with a deep understanding of the key drivers of the business. The Plan is designed to drive sustainable comparable sales and guest count growth, reliable long-term measures of the Company's strength that are vital to growing shareholder value. In 2019, execution of the Plan drove further broad-based growth around the globe. In 2020, the Company will continue to focus on elevating the customer experience through improved restaurant execution and creating excitement around our food and value offerings, while continuing to leverage technology to enable greater convenience and customer personalization. The Company continues to target the opportunity at the core of its business - its food, value and customer experience.
The strategy is built on the following three pillars, all focusing on building a better McDonald’s:
• Retaining existing customers - focusing on areas where it already has a strong foothold in the IEO category, including family occasions and food-led breakfast.
• Regaining customers who visit less often - recommitting to areas of historic strength, namely food taste and quality, convenience and speed, experience and value.
• Converting casual to committed customers - building stronger relationships with customers so they visit more often, by elevating and leveraging the McCafé coffee brand and enhancing snack and treat offerings.
The Company continues to scale and optimize the Plan through the following growth accelerators:
The Plan is a global strategy that is tailored at a market level to allow for the best customer experience and most convenience for our valued customers. While the Plan provides a consistent framework on how to retain, regain, and convert customers, the execution varies across the globe. The U.S., for example, remains centered on returning to guest count growth by focusing on running better restaurant operations, introducing new menu items and offering compelling value. In addition, we will continue transforming the customer experience through aggressive execution of the growth accelerators of EOTF, digital and delivery. In 2020, the markets around the world will continue to make progress on the three pillars of the Plan and its growth accelerators, focusing on food, value and customer convenience. Our Plan also includes the Company further embedding actions in response to certain social and environmental issues into the core of our business. As one of the world’s largest restaurant companies, our approach highlights our commitment to global actions that are consistent with our strategic priorities and provides an opportunity to collaborate with our franchisees and suppliers to drive meaningful progress.
We recognize that our success in advancing these initiatives will be demonstrated as customers continue to feel good about visiting McDonald’s restaurants and eating our food. While we are working to address many challenges facing society today, we are elevating global action where we believe we can make the greatest difference in driving industry-wide change. Our priorities reflect the social and environmental impacts of our food and our business. Highlights include science-based targets for greenhouse gas emissions reductions and climate action, advancing sustainable practices in beef production with suppliers and producers, driving innovative solutions for our packaging and recycling efforts, and ongoing commitments to support families and provide opportunities for youth in our communities. In 2019, for example, we made progress toward our 2030 climate action target with the addition of significant investments in renewable energy projects in the U.S.; we achieved our goal of 100% sustainably sourced McCafé coffee for U.S. restaurants; and we continued to make a difference for families through innovation in our food offerings, reading programs and support for Ronald McDonald House Charities. The Company is confident, that under the Plan, we will continue to improve the taste of our delicious food, enhance convenience and service through running great restaurants, offer compelling value, and heighten the trust consumers place in our brand, which we believe will enable us to deliver long-term sustainable growth.
The strategy is built on the following three pillars, all focusing on building a better McDonald’s:
• Retaining existing customers - focusing on areas where it already has a strong foothold in the IEO category, including family occasions and food-led breakfast.
• Regaining customers who visit less often - recommitting to areas of historic strength, namely food taste and quality, convenience and speed, experience and value.
• Converting casual to committed customers - building stronger relationships with customers so they visit more often, by elevating and leveraging the McCafé coffee brand and enhancing snack and treat offerings.
The Company continues to scale and optimize the Plan through the following growth accelerators:
- Experience of the Future. The Company is building upon its investments in EOTF, focusing on restaurant modernization in order to transform the restaurant service experience and enhance our brand in the eyes of our customers. The modernization efforts are designed to provide a better customer experience, leading to increased frequency of customer visits and higher average check. As of the end of 2019, EOTF is deployed in over half of the restaurants in our global system, with most of the major markets substantially complete. In 2019, the U.S. converted about 2,000 restaurants to EOTF, resulting in about 70% of the U.S. restaurants now having EOTF. In 2020, the Company will further deploy EOTF around the globe, including converting about 1,800 of the remaining restaurants in the U.S. to EOTF.
- Digital. The Company is improving its existing service model with customers through technology. Digital technology is transforming the retail industry, and the Company is using it to transform McDonald’s for our customers at an accelerated pace. By evolving the technology platform, the Company is expanding choices for how customers order, pay and are served their food. The added functionality of the Company’s global mobile app, self-order kiosks, and other technologies enable greater convenience for the customer on their terms. In 2019, the Company built on its digital foundation, acquiring Dynamic Yield, a leader in personalization and decision logic technology. The Company has implemented this technology via outdoor digital menu boards in over 11,000 U.S. drivethrus, offering customers a more customized experience and producing sales growth through higher average check. This technology is also deployed in nearly all drive-thrus in Australia, and we are looking to deploy across further international markets beginning in 2020. The Company continued to expand its technological capabilities via the acquisition of Apprente, an early-stage leader in conversational interface technology. This technology is expected to provide more efficient and accurate ordering in the drive-thru. In 2020, the Company will continue to utilize more personalized digital initiatives to engage customers, grow awareness and adoption of digital offerings, and support our menu offerings.
- Delivery. The Company continues to build momentum with its delivery platform as a way of expanding the convenience for its customers. In 2019, McDonald’s continued to add third-party delivery partners in order to maximize the System’s delivery scale and potential. Across the global system, nearly 25,000 restaurants now offer delivery. Customers are responding positively, as demonstrated by high satisfaction ratings, strong reorder rates, and average checks that are generally two times higher than average non-delivery transactions. Further, in some of our top markets, delivery now represents as much as 10% of sales in those restaurants offering delivery. Consequently, McDonald’s global delivery business has grown to over $4 billion in Systemwide sales in 2019, up from $1 billion in 2016. We continue to see great runway ahead of us to drive awareness and trial of delivery, and are focusing on efforts to encourage frequency and retention in 2020 and beyond.
The Plan is a global strategy that is tailored at a market level to allow for the best customer experience and most convenience for our valued customers. While the Plan provides a consistent framework on how to retain, regain, and convert customers, the execution varies across the globe. The U.S., for example, remains centered on returning to guest count growth by focusing on running better restaurant operations, introducing new menu items and offering compelling value. In addition, we will continue transforming the customer experience through aggressive execution of the growth accelerators of EOTF, digital and delivery. In 2020, the markets around the world will continue to make progress on the three pillars of the Plan and its growth accelerators, focusing on food, value and customer convenience. Our Plan also includes the Company further embedding actions in response to certain social and environmental issues into the core of our business. As one of the world’s largest restaurant companies, our approach highlights our commitment to global actions that are consistent with our strategic priorities and provides an opportunity to collaborate with our franchisees and suppliers to drive meaningful progress.
We recognize that our success in advancing these initiatives will be demonstrated as customers continue to feel good about visiting McDonald’s restaurants and eating our food. While we are working to address many challenges facing society today, we are elevating global action where we believe we can make the greatest difference in driving industry-wide change. Our priorities reflect the social and environmental impacts of our food and our business. Highlights include science-based targets for greenhouse gas emissions reductions and climate action, advancing sustainable practices in beef production with suppliers and producers, driving innovative solutions for our packaging and recycling efforts, and ongoing commitments to support families and provide opportunities for youth in our communities. In 2019, for example, we made progress toward our 2030 climate action target with the addition of significant investments in renewable energy projects in the U.S.; we achieved our goal of 100% sustainably sourced McCafé coffee for U.S. restaurants; and we continued to make a difference for families through innovation in our food offerings, reading programs and support for Ronald McDonald House Charities. The Company is confident, that under the Plan, we will continue to improve the taste of our delicious food, enhance convenience and service through running great restaurants, offer compelling value, and heighten the trust consumers place in our brand, which we believe will enable us to deliver long-term sustainable growth.
Intellectual Property of Mcdonalds
The Company owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. The Company considers the "McDonald's" trademark and the Golden Arches Logo to be of material importance to its business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. Patents, copyrights and licenses are of varying durations
Employees of Mcdonalds
The Company’s number of employees worldwide, including its corporate and other office employees as well as Company-owned and operated restaurant employees, was approximately 205,000 as of year-end 2019.
Seasonality of Mcdonalds earnings
The Company does not consider its operations to be seasonal to any material degree
Long term outlook of Mcdonalds
Over the long-term, the Company expects to achieve the following average annual (constant currency) financial targets:
- Systemwide sales growth of 3% to 5%;
- Operating margin in the mid-40% range;
- Earnings per share growth in the high-single digits; and
- Return on incremental invested capital in the mid-20% range
Mcdonalds (NYSE: MCD) stock performance
At least annually, we consider which companies comprise a readily identifiable investment peer group. McDonald's is included in published restaurant indices; however, unlike most other companies included in these indices, which have no or limited international operations, McDonald's does business in more than 100 countries and a substantial portion of our revenues and income is generated outside the U.S. In addition, because of our size, McDonald's inclusion in those indices tends to skew the results. Therefore, we believe that such a comparison is not meaningful.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2019. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2014. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
Our market capitalization, trading volume and importance in an industry that is vital to the U.S. economy have resulted in McDonald's inclusion in the Dow Jones Industrial Average (DJIA) since 1985. Like McDonald's, many DJIA companies generate meaningful revenues and income outside the U.S. and some manage global brands. Thus, we believe that the use of the DJIA companies as the group for comparison purposes is appropriate.
The following performance graph shows McDonald's cumulative total shareholder returns (i.e., price appreciation and reinvestment of dividends) relative to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the DJIA companies for the five-year period ended December 31, 2019. The graph assumes that the value of an investment in McDonald's common stock, the S&P 500 Index and the DJIA companies (including McDonald's) was $100 at December 31, 2014. For the DJIA companies, returns are weighted for market capitalization as of the beginning of each period indicated. These returns may vary from those of the Dow Jones Industrial Average Index, which is not weighted by market capitalization, and may be composed of different companies during the period under consideration.
Over the 5 year period Mcdonald's provided an average annual return of 19.3% while the S&P 500 returned 11.7% per annum. The stock of Mcdonalds has therefore easily outperformed the S&P 500 as well as the Dow Jones Industrial Average (DJIA). The stock of Mcdonalds has increased at 1.39 times the S&P 500 and 1.33 times that of the Dow Jones Industrial Average
Our latest Mcdonalds stock valuation (30 April 2020)
So based on Mcdonald's latest earnings report, what is our target price for Mcdonalds? Based on Mcdonalds latest earnings release our valuation model provides a target (full value) price at $149.90 a share (down from our 3rd quarter 2019 Mcdonalds earnings report). We therefore believe the stock of Mcdonalds is overvalued
We therefore believe from a fundamental investing and value perspective the stock price of Mcdonald's is overvalued and we would not recommend buying into the stock at its current price, but rather at levels about 10% below our target price which is at $149.90 a stock. We therefore believe a good entry point into the stock of Mcdonalds is at $134.90 or below.
We expect the stock of Mcdonalds to pull back from its current levels to closer to our target price in coming weeks and months.
We therefore believe from a fundamental investing and value perspective the stock price of Mcdonald's is overvalued and we would not recommend buying into the stock at its current price, but rather at levels about 10% below our target price which is at $149.90 a stock. We therefore believe a good entry point into the stock of Mcdonalds is at $134.90 or below.
We expect the stock of Mcdonalds to pull back from its current levels to closer to our target price in coming weeks and months.