McDonald’s: Its Advantages Keep on Paying-off

In its 67-year history, McDonald’s (MCD) has faced many challenges on both the demand and supply side of its operations, but it keeps on delivering superior financial results, thanks to multiple advantages of its business model. I’m bullish on MCD stock. 

Wall Street has noticed, making McDonald’s shares a big winner. TipRanks assigns the franchise giant a Smart Score of 8, citing strong technicals and increasing hedge fund activity.

Last week, the franchise giant reported solid Q4 results. Though earnings missed analyst expectations, sales exceeded them, with comparable-store sales up 12.3%. That’s thanks to the strong performance of McRib product, proving that McDonald’s can survive and thrive in good and bad times by adapting its menu to customer needs.

While 2021 was a year of challenges around the world, the McDonald’s system came together with unapparelled dedication and delivered an exceptional performance,” said McDonald’s President and Chief Executive Officer Chris Kempczinski. He continued, “We enter this new year with a clear focus on creating seamless and memorable experiences and harnessing our momentum to drive long-term, sustainable growth for all our stakeholders.”

Solid Financials

MCD’s financials should be the envy of the franchise industry. McDonald’s operating margin stands at around 45%, twice that of Wendy’s and four times that of Chipotle. McDonald’s free cash flow for the quarter ending December 31, 2021, was $1.98 billion, an over 29% increase year-over-year. MCD returns its cash to shareholders via dividends and buybacks.

McDonald’s’ Multiple Advantages

McDonald’s is among the few franchises that have endured the test of time thanks to multiple advantages of its business model. One of these advantages is its franchise organization, which the company invented, a horizontal organization that lets its franchisee-members, management, and shareholders share the risks and rewards from discovering and exploiting new business opportunities.

This allows the fast-food giant to achieve economies of scale and scope without the conventional monitoring and control problems common in conventional large restaurant chains. That’s why McDonald’s’ business model has become the standard for other franchise companies.

Another advantage of McDonald’s’ business model is its ability to adapt by coming up with new product menus and new services to cater to the changing consumer tastes and preferences. For instance, in the 1960s, McDonald’s provided a “fast and convenient menu” to cater to the tastes and preferences of the baby-boomer generation.

In the 1990s and early 2000s, McDonald’s “fast” and “convenient” menu was expanded by the addition of “healthy” and “more natural” products, like salads, fruits, and carrot sticks to address the tastes of a health-conscious consumer—part of a big movement at that time.

Then, there’s McDonald’s most important advantage, location. As a first-mover in the restaurant franchise space, McDonald’s has purchased and developed top real estate locations, which it leases to its franchisees, meaning that McDonald’s is a real estate trust, in addition to being a fast-food franchise. That could explain McDonald’s high operating margins and its ability to adapt to changing market conditions.

Wall Street’s Take

McDonald’s has a strong following in the analyst community. 23 analysts followed its shares in the last three months, rating the company a Strong Buy based on 21 Buys and two Holds.

The average McDonald’s price target of $288.95 implies 11.4% upside potential. That is not that bad of a return in a still low-interest-rate environment.

Summary and Conclusions

McDonald’s is among the few franchise companies that have managed to overcome the many challenges that came their way, from healthy food campaigns to economic contractions and the pandemic.

That’s thanks to the many advantages of its business model, especially the ownership of prime real estate locations, which give the company the ability to adapt to changing market conditions and deliver superior operating margins and free cash flow.

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