McDonald’s (MCD) is currently priced around $190 — and it’s easy to see why. Step into your local McDonald’s, and you will likely find a fairly lengthy line. Ronald’s menu is as popular as ever. The allure of all-day breakfast has certainly solidified business. Unfortunately, McDonald’s hiked some menu prices including the popular hash brown that now runs just under $2.
McDonald’s challenge lies in keeping menu prices under control as commodities become more expensive and customers enjoy access to that many more fast food/fast-casual options. Despite this, the franchise seems to be in a good position to remain a valuable option for investors.
Let’s explore why that is.
McDonald’s averaged nearly 5% growth at current locations throughout the entirety of 2018. This growth rate represents a slight decrease from that of the year prior. However, the silver lining is nearly ever region showed higher comps. All in all, McDonald’s customer numbers are up across global markets. The question is whether McDonald’s can continue to grow at a rate that pleases investors. Investors are certainly happy with the fact that McDonald’s has enjoyed two straight years of growth for the first time in seven years.
McDonald’s customer traffic declined in the United States this past year, dropping more than 2%. This is concerning as McDonald’s customer traffic increased by 1% in the year prior. Thankfully, average customer spending increased to offset the reduction in total customers in the United States. McDonald’s continues to gain market share as food quality increases and the in-restaurant dining experience becomes that much more enjoyable.
Prospective McDonald’s investors should be impressed by the fact that the restaurant thrived in a year that proved quite challenging for other chains. McDonald’s shines bright amongst the group with a meaningful increase in earnings. The company’s profit margin, cash flow and net income increased across the year. McDonald’s free cash flow came in at a whopping $4.2 billion. This figure represents a nice bump upward of more than 14% compared to the year prior. The company’s full-year margin dollars increased by more than $100 million. McDonald’s yearly operating margin came in at 43%, representing a 4% increase from last year. These figures are all the more impressive when you consider the fact that commodity prices have been on a steady incline.
The McDonald’s of the future will be highly digitized, personalized and automated. Company executives are zeroing in on using technology to personalize each customer’s McDonald’s experience. The fast food chain recently struck a deal with Digital Yield to implement new tech at its drive-thru menu displays. The screens will soon alternate between menus based on the time of the day. These high-tech screens will also highlight specific menu selections based on trends, traffic, weather and other variables.
As an example, the new menus will tout hot caffeinated beverages on overcast days and refreshing soft drinks on those blazing hot summer days. McDonald’s tested this emerging technology at select restaurants throughout the United States in 2018. Initial results show customers are more than pleased with the new drive-thru screens. Look for McDonald’s to continue to innovate, especially in the United States market, to regain the business of customers who have ventured to other fast food and fast-casual options in recent years.
McDonald’s executives have prudently determined spending to improve operations and restaurants is better than sitting on a pile of cash that would otherwise be collecting dust. The focus is squarely on enhancing the customer experience and regaining visits across posterity. The company shelled out about $2 billion to upgrade and modernize 4,500 of its locations in the United States this past year alone. The overarching aim of this investment is to spike the company’s domestic growth rate to match that in other markets such as China, France, Italy and Canada.
McDonald’s leaders plan on spending another billion dollars in the upcoming year to add self-order stations, digital menus and deliveries to 2,000 restaurants throughout the United States. If all goes as planned, McDonald’s customer traffic in the United States will move back into positive territory in 2019. Assuming the company continues to thrive in foreign markets, the renewed push to fortify its domestic customer base should position this fast food giant quite nicely for the years to come. McDonald’s belongs in every investor’s portfolio.
Regards,
Ethan Warrick
Editor
Wealth Authority
