McDonald’s Facing Macro Challenges, Impacts from the War in the Middle East

Image Source: Mike Mozart

By Brian Nelson, CFA

On February 5, McDonald’s Corp (MCD) reported decent fourth-quarter results with strong revenue growth coming roughly in-line with consensus estimates and non-GAAP earnings per share exceeding the Street’s forecast. Though the firm noted that it is experiencing some macro challenges and that its operations continue to be impacted by the war in the Middle East, we like having McDonald’s as a core restaurant holding in the Best Ideas Newsletter portfolio in part because of its mostly franchised business model that handles inflationary pressures well and its strong and world-renowned brand name. The high end of our fair value estimate range of McDonald’s stands at $345 per share, and the company yields ~2.25% at the time of this writing.

During the fourth quarter, global comparable store sales advanced 3.4% thanks to continued strength in the firm’s U.S. and International Operated Markets segments, though its International Developmental Licensed Markets segment weighed on overall performance due to the impact of the war in the Middle East, ultimately driving global comps slightly below expectations. Despite strong average check growth, McDonald’s lapped a very nice global comparable store sales growth rate of 12.6% in the fourth quarter of 2022, which was led by its International Operated Markets and International Developmental Licensed Markets segment, so the comparative weakness in these areas in last year’s fourth quarter is partially due to lapping a very strong comp in 2022.

McDonald’s consolidated revenue increased 8% (6% in constant currencies) in the quarter, while consolidated operating income advanced 14% (11% in constant currencies) after adjusting for restructuring costs related to its Accelerating the Organization strategy that seeks to scale innovations at a faster rate than before. We liked the pace of top line growth in the quarter, and McDonald’s continues to drive operating leverage in its business model. Adjusted diluted earnings per share increased 14% (11% in constant currencies) in the quarter as well. Here is what McDonald’s CEO Chris Kempczinski had to say about the quarterly results and full year performance in the press release:

Our global comparable sales growth of 9% for the year is a testament to the tremendous dedication of the entire McDonald’s System. Strong execution of our Accelerating the Arches strategy has driven over 30% comparable sales growth since 2019 as our talented crew members, and the industry’s best franchisees and suppliers have demonstrated proven agility with a relentless focus on the customer. By evolving the way we work across the System, we remain confident in the resilience of our business amid macro challenges that will persist in 2024.

McDonald’s held a rather large net debt position at the end of 2023, coming in at ~$32.6 billion, but we have no concerns about its financial leverage. Cash flow from operations surged to ~$9.6 billion in 2023, up from ~$7.4 billion in 2022, while 2023 free cash flow of ~$7.25 billion expanded 32% on a year-over-year basis and comfortably covered the firm’s cash dividends paid of ~$4.53 billion during 2023, suggesting considerable room for future dividend growth. Though McDonald’s raised some red flags regarding the macro environment in its commentary, and the war in the Middle East is impacting results, we continue to like the company’s mostly franchised business model and strong brand name that speaks to sustainable growth in its operations.