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McDonald's - double digit Q3 growth

Sophie Lund-Yates, Equity Analyst | 27 October 2021 | A A A
McDonald's - double digit Q3 growth

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McDonalds Corporation Com Stock US0.01

Sell: 250.03 | Buy: 250.15 | Change -7.10 (-2.76%)
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Total third quarter revenue rose 13% to $6.2bn, reflecting fairly even growth between owned and franchised restaurants, which posted 12% and 14% growth respectively. Operating profit rose 18% to $3.0bn as costs rose at a slower rate than revenue.

The group announced a 7% increase in the quarterly dividend, which will be $1.38 per share.

The shares rose 2.8% in pre-market trading.

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Our View

The past year and a half's lost sales are little more than a blip on the radar.

McDonald's has proved incredibly resilient, proving the power of its two biggest assets: its unrivalled brand and enormous footprint - which is essential for capturing the convenience traffic it so sorely needs. We're particularly heartened by the pick up in domestic trade, which is an area of strategic focus going forwards.

The group used the opportunity brought on by the pandemic to build out its digital presence and delivery options, a strategy that has boosted sales in the US. That allowed many of the restaurants to continue operating despite indoor dining restrictions. The group's not abandoning this push online now that things are settling down, instead it's a key pillar in McDonald's future growth strategy. Leveraging existing infrastructure (kitchens) to serve more customers is a great recipe for margin expansion when looking at a longer-term view.

McDonald's "experience of the future" (read: the increased digitisation of its stores and capabilities) is a necessary move if the world's shift online is a permanent one. But outside banging the digitization drum, we've not had much clarity regarding its- "Accelerating the Arches" initiatives. Platitudes like "our brand will become a growth driver in its own right" don't give us much to work with. McDonald's enviable intellectual property is a significant advantage - but we'll reserve final judgement until we have more information.

It's not all happy meals and smiles, though. While McDonalds' results show the group's moving swiftly on from the pandemic, the ordeal isn't firmly in the rear-view mirror just yet. Further lockdowns can't be ruled out, particularly in parts of the world where vaccination rates are lower. We're already seeing growth held back in China and Australia as cases remerge.

McDonald's is also lugging around a hefty debt pile. At the end of last year net debt including leases was $45.1bn, or 5x cash profits. The group's strong cash generation and current low borrowing costs means this isn't a problem per-say, but if earnings encounter another setback it's not an ideal set up.

McDonald's has done more than survive the pandemic--the fast food chain's digital transformation is thriving. The group is well positioned to continue pushing that initiative while it continues to face some uncertainty. Despite a price-to-earnings ratio beyond the long-term average we think the group's long-term growth story is a strong one although there are no guarantees.

McDonald's key facts

  • Price/Earnings ratio: 24.2
  • 10-year Average Price/Earnings ratio: 20.7
  • Prospective dividend yield (next 12 months): 2.3%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Trading Update

In the US, comparable sales were up 9.6%, with average amount spent rising. That was because of larger orders as well as higher prices. Digital sales were helped by the launch of the McDonalds loyalty programme. On a 2 year basis, comparable sales are up 14.6%. Total sales were up 8% and reached $2.2bn, while operating profit was up 16% to $1.3bn.

"Very strong positive comparable sales in the UK" helped overall comparable sales rise 13.9% in International Operated Markets. Other areas including Canada and Germany did well too, helped by fewer restaurant closures, although new restrictions held performance back in Australia. Sales were up 16% to $3.3bn, and profits grew even faster at 24% to $1.5bn.

In International Developmental Licensed Markets comparable sales were up 16.7%, which included strong growth in Japan and Latin America. Growth in China was muted by increasing Covid cases. Compared to pre-pandemic levels, comparable sales are up just under 5%.

The group said "COVID-19 continued to result in some instances of government restrictions on restaurant operating hours, limited dine-in capacity and, in some cases, dining room closures".

Operating costs and expenses rose from $2.9bn to $3.2bn, including a moderate increase in company-operated restaurant costs.

The group expects "2021 capital expenditures to be approximately $2.3 billion, nearly half of which will be directed towards new unit expansion across the U.S. and International Operated Markets." It also expects a free cash flow conversion rate of over 90%.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.