McDonald’s, Morningstar medita di alzare il target
di RJ Hottovy, equity strategist di Morningstar
U.S. comparable sales growth of 5.7% was the clear highlight from McDonald’s fourth-quarter update, as it validates many of the turnaround initiatives put in place by CEO Steve Easterbrook less than a year ago and gives us greater confidence in the brand and franchise system intangible assets underpinning our wide moat rating. While the launch of all-day breakfast in October was a clear positive–management noted that it is driving incremental guest counts and driving increased average transaction sizes–we believe the more relevant takeaway for investors is that McDonald’s franchisees, suppliers, and marketing teams appear to be better aligned than at any point in the past several years. In our view, this bodes well for the launch of a national value platform in 2016-likely structured similar to the current McPick 2 promotion, which has been successful by most accounts–as well as “Experience of the Future,” mobile technology, and ordering/customization/service innovations adapted from other geographies. While we don’t expect U.S. comps to continue at the same pace as the fourth quarter, we now expect comps of 4% in 2016 versus earlier projections of 2.5%, even as it faces tougher comparisons in the back half of the year.
We’re planning to raise our $118 fair value by a few dollars based on a more optimistic near-term sales outlook. Management’s 2016 outlook-3%-5% constant currency systemwide sales growth and 5%-7% operating income growth–still appears realistic based on top-line momentum and structural changes that have improved McDonald’s operating leverage. While we view shares as fairly valued and find more attractive investment opportunities within the quick-service restaurant category (including Yum Brands, trading at a 27% discount to our fair value estimate), we walked away from the fourth-quarter update with greater conviction that McDonald’s turnaround efforts are sustainable and would not require much margin of safety before taking a position.
Management plans to refine its longer-term strategies and financial targets sometime toward the middle of 2016, though we don’t expect major changes to our longer-term discounted cash flow assumptions. These include mid-single-digit consolidated system sales (on a constant currency basis) and low- to mid-single-digit consolidated revenue growth, driven largely by new unit openings from the International Lead and High Growth Market segments as well as a return to low-to-mid single-digit comparable sales growth through new menu innovations, modernized customer experience, market share recaptured in the U.S. (management noted that U.S. comps of 5.7% outpaced the broader QSR sandwich category by 290 basis points during the fourth quarter), and inflationary price increases. From a profitability standpoint, we plan to raise our operating margin forecast to a little more than 31% in 2016 (compared with 28.1% in 2015), with food and occupancy expense leverage and selling, general, and administrative cost discipline (SG&A expenses are expected to decrease 1%-2% on a constant currency basis despite costs associated with the Worldwide Owner\Operator Convention in the second quarter and Summer Olympics sponsorship in the third quarter) offsetting wage cost pressures and other labor investments. Over the next 10 years, our model continues to assume consolidated operating margins reaching the mid- to high 40s, driven largely by comparable sales increases and the impact of refranchising activity.