Stockchase InsightsMcDonaldsMCDHOLDOct 11, 2023

Feeling impact of lower- and middle-income consumer; value menu tweaks will take time. Traffic is soft. US economy is K-shaped. Helping frachisees upgrade restaurants. Sees room to grow its chicken market, but equipment needs to be retooled.

Still likes it. Economies of scale, synergies, gets rent from many franchisees (a recurring cashflow stream).

Last month, this was a show-me story. Their investor day in late September saw shares fall when investors balked at the cost of store renovations. But he also saw value in the technology they were using that should improve efficiency. Also, its PE was getting too cheap to ignore. Since March, MCD shares have fallen a third in early October. In the past month, investors have rotated out of the tech trade into defensives like MCD which has risen 21%. Today MCD reported merely okay results: a topline miss, total company revenues rose only 1% over the year, comparable same-store international sales were up, but missed, but there was a healthy bottom line beat. Management has a clear plan to extend this momentum, and Q4 has gotten to a good start. The stock has bottomed.

Fast food faces higher labour and food costs, while the poor consumer isn't spending $20 on a Big Mac meal. There needs to be a new narrative, like investors needing to own more defensive assets. MCD results remain strong. It will grow around 6-7%, but he's looking for double-digit growth. The valuation is attractive enough that you can hold this as a core position.

He's been writing puts to buy it these days. Likes the valuation now. It's a growth story, so he buys on pullbacks, but it's also cyclical consumer.

Looking at it for the first time in many years. Still not cheap enough for him. K-shaped economy is weighing on it. Inflation is hitting the consumer who visits MCD. Great brand, not going anywhere, will come out of it.

He sold half his position recently. At least they aren't losing market share. When gas prices are this high, people don't have money to eat out. MCD is disappointing.

Restaurant and consumer staples sectors have been under pressure, partly due to "Ozempic effect". Also, low-end consumer feeling pinched by inflation.

Limited success with value meals. That end of the economy is under pressure, unlikely to change in near future. Fuel prices are high, and likely going higher over the winter. It's actually a REIT, and they have a hard time when interest rates rise. Technically, trading below long-term MA.

Renewed traffic is down 1%. MCD is focusing on their app, but sales re flat and international sales were light. With renewed focus on the US, he expect a stronger second half of 2026.

Great business, but it also trades like one. Fallen off along with a lot of the other restaurant stocks. For its business, current price is not bad.

Instead, he owns QSR (and that's more on price, not on quality).

His team initiated a position last year and added to it in this last drawdown. Very little wrong with the business itself. It's struggling because US customers are struggling. Continues to open stores and grow same-store sales. Close to 20x PE, steady Eddie. 

Is near August 2024 lows. Is still operating very well, but inflation is eating into profits. Don't need to rush into this.

The headwinds are pretty severe, The consumer is strapped along with a K shaped economy where 80% are at the lower end and are struggling. They make up the bulk of McDonalds users. There is also a strong move towards better eating habits, health consciousness and weight loss medications.

It's fine, but beef is too expensive. MCD yields 2.6% and has a great reputation and sells at 21x PE. You can buy a tranche now, then more at $275, $270, $265 and $260.

Half its business is NA, half international. Not a huge amount of growth, perhaps 5-6%. EPS growth of 7-8%. Opens a few new stores a year. More of a landlord, with over 90% franchised. Very high ROIC. 

Only 20x PE today, down from historically high 20s. In his world, it's a staple not discretionary :) Yield is 2.65%.