Markets

McDonald's Could Be Looking at Upside from Customer Traffic Growth

McDonald's ( MCD ) competes with Wendy's ( WEN ), Burger King, and Yum! Brands ( YUM ) in the fast food market, and is the market leader with about 19% share. The company also competes with Starbucks ( SBUX ) in the specialty coffee market.

McDonald's owns and franchises restaurants across the globe with over 32,000 restaurants in 117 countries. Of these, roughly 80% are operated by franchisees, with the balance being company-owned. We estimate that franchisee rent & fees accounts for 62% of McDonald's stock value with franchisee royalties generating an additional 29%. The remaining 9% comes from company-owned restaurants.

We currently maintain a $78.40 price estimate for McDonald's stock , slightly ahead of market price.

The average number of customers visiting McDonald's restaurants has increased steadily over the years, although growth tapered off slightly during the recent economic downturn. The company's restaurants have sustained customer traffic by offering new products and adjusting operating hours, in addition to promoting its traditional value-based offerings.

Going forward, we anticipate a further rise in McDonald's customer traffic, at an annual growth rate of about 1.5%. But with positive underlying trends gaining momentum, our forecast could prove conservative. McDonald's has made waves recently with its healthy food and specialty coffee offerings. On top of these initiatives, the company is also recording strong revenue growth in Europe - a substantial trend given that Europe accounts for about 40% of the company's revenue.

Strong Revenue Growth in Europe

McDonald's reported same-store January revenue growth of roughly 7% year-over-year (YOY) in Europe, which accounts for a substantial 40% of the company's revenues. The result was partially driven by new product launches and extended operating hours. The launch of new products, in addition to longer restaurant operating hours are factors that helped to drive sales. Going forward, we'll be on the lookout to see whether the company can sustain revenue growth through price hikes (in response to rising prices for raw materials like beef, dairy and coffee), or whether higher prices will hurt sales as customers are drawn away.

Healthy Food Initiatives

McDonald's is also emphasizing new initiatives to introduce items with lower calorie counts than its traditional offerings. The chain has already added healthier options like salads and wraps and taken steps to reduce sugar and salt in its buns. Up next? How about a diet Big Mac to go?

How much upside McDonald's can generate from these efforts remains to be seen. Research on children and teens in New York City found that, although 57% of kids notice the calorie counts posted on fast food menus, only 9% claimed that the data influenced their food choices. While children and teens are aware of the health data, it appears that taste still drives their decisions.

Customer Traffic Outlook

While we anticipate 1.5% annual growth in customer traffic, the recent product initiatives and strong revenue growth could position the company for further upside to this metric. If the annual growth of customer traffic at McDonald's restaurants increases by 150 basis points beyond our forecasts, it would imply 10% upside to our $78.40 price estimate for McDonald's stock .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.