The world’s largest restaurant chain deserves a valuation premium over peers.
By guest author Spencer Jakab from the Wall Street Journal.
Following McDonald’s MCD -0.58%decrease; red down pointing triangle means chewing on some very big numbers. The chain, which sold its billionth hamburger to great fanfare in 1963, used to keep track of every incremental billion and then 5 billion served on the golden arches outside its U.S. restaurants. It finally gave up counting during the 1990s after hitting 12 digits.
There are some equally mind-boggling figures surrounding the chain today, and not just in its pleasing first-quarter earnings report released Tuesday morning. Its sheer heft as the world’s largest restaurant chain, along with a good dose of digital savvy, has helped expand its lead over fast-food rivals. Consider, for example, that there were 127 million downloads worldwide of the chain’s app last year, according to Apptopia. That is more than the number of downloads of Uber, PayPal or Amazon Prime Video, twice as many as leading dating app Tinder and almost four times as many as the next-closest industry competitor, Starbucks. Even in the fast food-happy United States, downloads last year numbered as many as the second, third and fourth competing app combined.
That is paying off handsomely. McDonald’s said digital systemwide sales in its six largest markets reached USD 7.5 billion in the first quarter to almost 40 % of the total. Winning in fast food has traditionally been a constant battle of balancing price and food quality while, in a highly-franchised company like McDonald’s, keeping your partners happy and profitable. McDonald’s has done a decent job on that front, though with some recent discontent from franchisees. Some are seeking state legislation that would give them more control over certain decisions.
Their grumbling has extended to its edgy marketing. For example, some objected to the chain’s marketing tie-up with musical artists Cardi B and Offset. While there is always a danger to hitching your reputation to an outsider, or to any edgy marketing campaign, management probably deserves the benefit of the doubt on that front at the moment. It has hit a series of home runs recently—notably its adult Happy Meals. Its Cactus Plant Flea Market promotion last year led to a run on its restaurants and its highest ever weekly digital sales.
The main concern for the chain in the medium term is how its not especially wealthy core consumer will react to pinched real incomes as a result of lingering inflation, rising debt service levels, or to a recession. The answer Tuesday was so-far, so-good with same-store sales up 12.6 % year-over-year both in the U.S. and foreign markets, exceeding expectations. There is little doubt that a major pullback is bad for business. In the severe 2007-2009 downturn, though, McDonald’s fared relatively well despite its core customer being hard hit, with its stock falling only half as much as a broad index of U.S. restaurant stocks. It is likely to be even more insulated than peers the next time around given its daunting digital edge, which engenders loyalty and enables value promotions.
Observers interpreted surprising recent corporate layoffs at McDonald’s as the company bracing for recession, but investors have been sanguine. McDonald’s shares hit a record high in premarket trading Tuesday, leaving them at nearly 27 times prospective earnings based on FactSet consensus. Though hardly cheap in absolute terms, it places them roughly on par with that broad index of U.S. restaurant stocks compared with an average discount of 5% over the past 10 years.
Depending on the outlook, McDonald’s might well be fully priced, but it arguably deserves a premium over its peer group however one reads the economic tea leaves.
Appeared in the April 26, 2023, print edition as ‘McDonald’s Keeps Its Edge’.