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McDonald's - margin guidance nudged up after strong Q3

McDonald's total revenue in the third quarter was $6.7bn, marginally ahead of forecasts, with like-for-like sales up 8.8%.

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McDonald's total revenue in the third quarter was $6.7bn, marginally ahead of forecasts, with like-for-like sales up 8.8%. Strong growth was seen both in the US and overseas.

Operating profits were up 16% to $3.3bn reflecting strong overall revenue growth and good cost control.

Full year operating margins are expected to land at about 46%, up from previous guidance of 45%. The free cash flow conversion target of over 90% remains in-tact.

The quarterly dividend was raised 10% to $1.67 per share.

The shares were up 2.6% in pre-market trading.

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Our view

There's no obvious sign that embattled consumers are willing to cut back on Big Macs and Happy Meals, as they examine their spending habits. Once again McDonald's is showing its ability to thrive in difficult economic conditions.

The Group's largely franchised model is an efficient operation, with McDonald's off the hook for many of the typical restaurant running costs. Cash conversion in excess of 90% means the vast majority of profits feeds into cash for the business to either spend or return to shareholders.

McDonald's' strong cash flows give it the headroom to cope with bumps in the road and continue its expansion plans, with 1,500 net restaurant openings expected this year. The bias in openings towards franchised operations should help margins once the stores are running at full pelt. It's also been spending on revitalising stores, whilst continuing to improve the digital presence.

Operating margins have been robust so far. And efforts to trim the cost base appear to be having the desired effect with full year margin guidance nudged up following third quarter results, to about 46% - a small increase over 2022. If inflation continues to moderate, we think there is potential to build this out a little further.

McDonald's is also lugging around a hefty debt pile. It expects 2023 interest costs to grow in the region of 12-13%, driven by the higher debt balances and interest rates. The group enjoys strong cash generation but given the increasing cost of debt, we think reduction should be a priority.

The fast food chain's convenience transformation is thriving, with improvements in the online service, delivery and drive thru. We think the brand strength remains as strong as ever and recent social media campaigns underline its ability to connect with today's generation. The valuation has now crept below the long-term average and doesn't look too demanding. But there could be some bumps in the road ahead, especially as we think consumer spending's likely to come under further pressure in the coming months.

McDonald's key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Article history
Published: 30th October 2023