🍔 McDonald's after the drop: boring company or one of the highest-quality compounders on the market?
McDonald's ($MCD) is, in my opinion, a beautiful example of a company whose revenue alone doesn't capture the quality of the business.
At first glance, it's a fast-food chain.
In reality, it's more of a combination of:
global brand + franchising + real estate + royalties.
And that's exactly why McDonald's has such good economics.
Around 96% of restaurants are operated by franchisees.
The franchisee handles employees, day-to-day operations, and a large portion of capital expenditures.
McDonald's then collects:
💰 royalties on sales 🏢 rent 📍 fees for using the system and location
And with its large number of restaurants, it also controls the real estate itself.
That's why I view MCD more as an asset-light royalty machine than an ordinary restaurant company.
📊 Economics are very nice
McDonald's currently operates with an operating margin of around 46%.
The company generates billions of dollars in free cash flow and returns a large portion of cash to shareholders.
And this is where I like MCD even more.
💵 dividend has been growing for 49 consecutive years 💰 dividend yield is around 2.8% 🔄 the company regularly does buybacks 📉 share count has been declining long-term
So shareholder return doesn't come only from business growth itself.
It's a combination of:
earnings growth + dividend + buybacks.
🏪 And growth hasn't completely ended yet
McDonald's has more than 45,000 restaurants and aims to reach roughly 50,000 locations by the end of 2027.
That's still a very decent expansion for such a huge company.
And the big advantage?
New locations are largely not financed by McDonald's itself.
Capital is provided by franchisees.
Thus McDonald's can expand its system without having to pay for each new restaurant from its own balance sheet.
📱 Another growth engine is digital.
McDonald's already has hundreds of millions of loyalty users.
The app and loyalty program are not just a nice bonus.
The company gains:
more customer data,
higher visit frequency,
personalized offers,
easier ordering,
higher customer retention.
For a brand with such a huge customer base, even a small increase in visit frequency can mean billions in additional systemwide sales.
⚠️ But it's not without risk.
The biggest problem today, in my opinion, isn't competition.
It's the value proposition.
McDonald's has to remain a place where customers feel they're getting reasonable food at a reasonable price.
If prices rise too quickly, customers may say:
"For this money, I'd rather sit down at a regular restaurant."
Especially lower-income groups in the US are price-sensitive today.
Another problem is debt.
McDonald's has very stable cash flow, but its balance sheet is definitely not of the Microsoft or Google type.
And the company's own growth naturally won't be 15-20% annually.
💰 Valuation is therefore key.
After the drop, MCD trades around 20x forward earnings.
And here it starts to make sense to me.
My simple base case:
📈 EPS growth around 8% annually 💵 dividend around 2.8% 🔄 continuing buybacks 🏪 growth in restaurant count 📊 slight margin expansion
I don't need to assume any miracle.
At an unchanged valuation, this gives me potential of roughly 10-12% annual total return.
And for a company with such a moat, that seems very decent to me.
MCD, in my opinion, isn't a stock where you should expect 5x in three years.
It's more of a company like:
"Buy a quality business at a reasonable price and let it do its job for ten years."
And after the current drop, McDonald's is starting to look considerably more interesting to me.
Below around 18-19x forward earnings, I would already consider this company truly attractive.
🍔 What about you?
Is McDonald's interesting to you at today's valuation, or would you wait for an even better price?