Drive-Thrus Offer McDonald's Advantages
Despite industry uncertainty, we are maintaining our fair value estimate for the wide-moat company.
Comp trends have continued to improve since wide-moat McDonald's (MCD) mid-June update, but the key question coming out of the second quarter is whether this is sustainable. June consolidated comps decreased 12.3%, up from a 20.9% decline in May, and July comps appear to be on pace for a mid- to high-single-digit decline (with U.S. running slightly positive, international operated markets running at mid- to high-single-digit declines, and international developmental licensed markets likely running at high teens declines).
On one hand, macro pressures (including elevated unemployment, which has historically been a leading indicator for quick-service restaurant sales trends, and uncertainty regarding future government assistance), a potential return of restaurant operating restrictions in several markets, an uptick in industry promotional activity, and softer breakfast trends due to the reduction in morning commuters will likely result in uneven month-to-month sales trends in the back half of 2020.
On the other hand, we share management's view that the second quarter is likely to be the sales trough for the year. First, with McDonald's choosing to conserve its resources until COVID-19 containment efforts stabilize, it has amassed a significant "marketing war chest" (including a commitment for $200 million in marketing support in the U.S. and international operated markets), which gives it multiple ways to stimulate growth, including greater emphasis on value. Second, we see increasing contribution from McDonald's drive-thrus due to efficiency improvements (15-20 seconds of per-order improvement in major markets) and Dynamic Yield's suggested ordering technologies, which should drive average check sizes higher. Lastly, we expect menu innovation across all dayparts in the back half of the year, including new value and chicken products.
Taken together, we don't plan a material change to our $205 fair value estimate, and we see the shares as modestly undervalued.
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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.