McDonald’s Earnings: Shares Rally as Comparable Sales Recover Amid Focus on Value and Innovation

Key Morningstar Metrics for McDonald’s Corp

• Fair Value Estimate: $312
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of McDonald’s Corp’s Earnings

McDonald’s second-quarter global comparable sales grew 3.8%, with growth across geographies including a 2.5% improvement in the US. This was a sharp improvement sequentially and from the year-ago quarter in which every segment reported negative comparable sales.

Why it matters: McDonald’s is reliant on low-income consumers, who continue to struggle, evident by double-digit traffic decline to all QSRs. However, we think the company’s recent efforts focused on value offerings and innovation have driven growth in its guest count despite the environment.

• Middle-income consumer traffic showed improvement, with QSR traffic growth turning positive during the quarter. Although not as large as the low-income group, we still see it as an easing headwind that should help drive comparable-sales growth.
• In addition to focusing on value offerings and menu innovation, the company looks to leverage marketing to improve customer awareness. With many promotions appearing in the loyalty app, a first glance at in-store menu boards doesn’t fully communicate available value options.

The bottom line: We expect a low-single-digit percentage increase to our $312 per share fair value estimate for wide-moat McDonald’s, primarily because of the time value of money. After today’s 3.7% share price rally, shares have returned to fairly valued territory.

• Management maintained its full-year outlook for net restaurant growth to contribute slightly over 2% to systemwide sales growth in constant currency and operating margin in the mid- to high-40% range, which lines up to our preprint forecasts.

Bulls say: McDonald’s loyalty program through its app could drive more robust growth than the low-single digit percentage annual comparable sales we forecast in the long term. Although the group remains small, management said annual visits increase from an average 10.5 to 26 after joining.