McDonald’s Will Prosper Despite the Impact of the Coronavirus

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McDonald’s (NYSE:MCD) just keeps going from strength to strength. But MCD stock is now down approximately $30 from its January 2020 peak of $217.50.

MCD stock

Source: ATIKAN PORNCHAIPRASIT / Shutterstock.com

I believe it is likely to recover and do quite nicely during 2020. This is probably a good time to buy MCD stock.

McDonald’s global sales on a comparable basis were up 5.9% in 2019. This is the highest growth rate in the past 10 years. With this in mind, MCD stock is likely to get through the dip caused by the coronavirus from China.

McDonald’s Earnings Have Grown Despite Flat Sales

Let’s face it. People still love to eat at fast-food restaurants. McDonald’s is at the top of their list. The thing is, though, McDonald’s sales have been flat for a good while. In fact, over the past 10 years, sales have actually fallen.

You can see this in the chart below.

MCD stock - Revenue

Source: Mark R. Hake, CFA

The chart above shows that sales have actually fallen by over 7% in the past 10 years.

But amazingly, McDonald’s earnings have grown dramatically during the same period. Last year, for example, earnings per share rose by 5%. And over the past 10 years, earnings per share have actually almost doubled.

MCD stock - Revenue and EPS Growth

Source: Mark R. Hake, CFA

You can see this in the chart above. It shows that cumulative revenue growth has been negative 7% during the last 10 years. But McDonald’s cumulative earnings per share growth has been almost 92%.

One of the interesting things about this is that McDonald’s has actually now switched the composition of its sales. For example, for a long time, the majority of its revenues came from company-owned stores.

MCD stock - Revenue composition history

Source: Mark R. Hake, CFA

More Franchisee Stores at McDonald’s

Things are changing. For the past several years, as the chart above shows, the majority of the company’s revenue now comes from franchised restaurants. This is represented by the green columns in the chart above. You can see that the green columns are now higher than the pink columns.

This is the result of McDonald’s new policy of selling a number of its stores to franchise owners. These franchise owners pay various fees and royalties to McDonald’s.

One of the reasons that McDonald’s has made this transition is because it wanted to lower its capital expenditures. These expenses are now made by its franchisees for the previously company-owned stores.

Higher FCF Growth Will Push Up MCD Stock

As a result, the company’s free cash flow has risen in the last 10 years. You can see this in the chart below. FCF is now $5.7 billion. It represents 27% of the company’s 2019 sales.

MCD stock - FCF Ma

Source: Mark R. Hake, CFA

But 10 years ago, FCF was only 17% of the company’s sales. So in the last 10 years, even though revenue was flat, FCF has risen dramatically.

This is a direct result of the company converting to a higher level of franchisee sales and lowering its capex spending. It freed up money that the company can now use for dividends and buybacks.

Bottom Line: MCD Stock Will Benefit From Higher FCF

Here is how that works. McDonald’s expected FCF for 2020 is at least $5.4 billion, slightly lower than last year’s $5.7 billion. Since McDonald’s market value is $140 billion, FCF represents a yield of 3.9%.

Over the next several years, McDonald’s FCF will grow 10% or so over the 2019 level. That means that FCF will hit $6.3 billion. At a 3.9% FCF yield, the market value of MCD stock will be $162 billion.

Now, since McDonald’s has been buying back stock at about 2.5% of its shares outstanding per year, we can assume that shares outstanding will be lower by at least 5% in two years. That would put the share count at 715 million.

As a result, the estimated true value for MCD stock is $196 per share. This represents an upside of 6% from today’s price — even as the coronavirus continues to spread.

Bottom Line: MCD stock is likely to do quite well over the next several years, despite the impact of the coronavirus outbreak on economic activity.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/mcd-stock-virus-outbreak/.

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