McDonald’s New Fees Won’t Move The Needle, But Growth Will
2023.09.26 09:45
- McDonald’s new franchise fee is unlikely to move the needle for sales or earnings.
- The company’s growth trajectory is robust and driving value for shareholders.
- A price pullback presents an opportunity that investors may not want to pass up.
McDonald’s (NYSE:) announced the first increase in US franchise fees in over 30 years, but this news is unlikely to move the needle. While the 100 basis point increase is worth 20% in theoretical revenue gains in the US segment, some important details should be considered. The first is that the new fees only impact new restaurants. Existing franchisees won’t have to pay the new fee; only those wishing to open a new restaurant or buy an existing company-owned store. That cuts down drastically on the potential impact, but there is more.
McDonald’s U.S. footprint has been declining, so the new fee will unlikely do much to spur growth. The company added new stores for the first time since 2014 in 2022 and is expected to add more this year, but not enough to significantly boost revenue by fee alone. The company targets 400 new US stores, about 2.95% store growth, which makes store count .
Regarding store count, the company expects to add at least 1,500 net locations this year, with most opening in China. That’s worth nearly 4% in system-wide store count growth, and emerging markets will see the most substantial gains. There are about 5,000 McDonald’s in China, compared to 13,500 in the US, making it and other emerging markets an explosive opportunity. Store count in China could more than double and not match that of the US, and China is a larger addressable market providing a longer runway for growth.
The Analysts Like the Cut of McDonald’s Growth Outlook
As tepid as the outlook for restaurant growth is, analysts continue to buy into the McDonald’s story. Marketbeat.com is tracking 28 analysts with current ratings that have a consensus of Moderate Buy with a price target that is trending higher. The price target implies a 20% upside at the midpoint and a 2.5% upside at the range’s low end, suggesting the stock is deeply undervalued.
Among the most recent analyst activity is an upgrade from Wells Fargo. Analysts at the firm upped the stock to Overweight, citing a wall of worry, near-term catalysts, revenue and margin upside. Assuming the next earnings reports align with the outlook, the consensus should continue to trend higher and lead the market if a price-action rebound doesn’t form soon.
The next major catalyst for MCD share prices will be the Q3 results scheduled for release in late October. The company is expected to post a solid 11% top-line gain, which may be a cautious estimate. The analysts have been lowering their estimates for revenue and earnings since the last report despite outperformance and a solid outlook for business.
Institutions have been buying MCD shares over the past year. They’ve bought at a pace of nearly 2:1 versus sellers and have over 67% of the stock holdings. Aside from the growth outlook, the reasons are the beta and yield. Shares of MCD pay better than the S&P 500, have a more stable growth outlook, and trade with nearly half the volatility. Considering the risk facing the broad market, it’s not a surprise to see institutional money flowing into a stock with these qualities.
The Technical Outlook: McDonald’s Pulls Back to Support
The price action in MCD is pulling back to support. The sell-off could continue, but the market is near a critical support level with favorable indicators. MACD, stochastic, and RSI suggest the market is oversold at current levels and ready to resume the uptrend. If so, a bottom should form soon and lead to another rally. Critical support is near current levels; a move below $269 could lead to another $10 decline or more.
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