Why I exited from McDonald's.

The rationale behind the decision.

McDonald's
McDonald's

Let's talk about $MCD

First of all I want to say that I think McDonald's is a great business. It has worldwide reach, when you travel and you want a cheap and "safe" option, McDonald's is the way to go. Its restaurants are open till late, so that people who are hungry at night can have a quick and satisfying snack, and I know a lot of them. It's such a strong, powerful and known brand.

Its huge customer base and now electronic based checkout can gather an immense amount of data, that it can use to leverage its advantage better targeting and customising its offering, a big step into this direction has been the acquisition of Dynamic Yield.

Despite the brand being often labeled as unhealthy, every time I go inside one of their restaurants I find them always full of customers, much more than the local bars or medium/high level restaurants.

They could also automatise the entire checkout process, removing some others employees and thus expanding a bit the margins.

Wow, looks great! Why the heck have you exited?

That's the exact point! In my view all has been going on too rosy for $MCD, and I think that all this growth (well priced in the stock price) is unrealistic to sustain for the years to come. It's a good business trading at an overvalued price. I would surely buy $MCD at a fair price, but I don't think $200 is a fair price. I would say a 15x EPS for a price of $115 and a yield of ~4% would be a much better entry point with a decent margin of safety.

It is now valued at 26x its EPS with a 2.5% yield and it's not appetible to me for a company at this stage. I think it's definitely too much and too optimistic. McDonald's is neither a startup nor a medium sized company looking to an impressive expansion. I think it is an old and mature business, that can still have a bit of growth but it should be mainly a cash cow, capitalizing on its position to redistribute big cash checks to the shareholders.

Every large or mid-sized city has a McDonald's restaurant, and their are running at full capacity, can that really grow from there? To me it seems near the peak, I don't believe it can add many others restaurants with significant gain.

Going more on the financial side, the top line has been shrinking for six straight years. It has gone from revenues of 28B in FY2013 to 21B in FY2018, a decrease of 27%!

That said it has not been reflected in the stock price as the bottom line has been instead constantly growing through a mix of cost cutting and shares buyback. From 1B shares outstanding in FY2013 to 750M in FY2018, a 25% shares reduction. From 17B of costs of goods sold in FY2013 to 10B in FY2018, a 40% reduction. Meanwhile the operating expenses remained almost flat.

For sure it may still cut some other cost, yet it is a fast-food low-price company, it has almost no pricing power (people mostly go to McDonald's only because is the cheapest) and there is a limit at what you can cut without loosing customer for the worsening quality (burger size and meat) and service.

Looking at the balance sheet no good news either, in the meantime the debt has more than doubled! From 14B in FY2013 to 31B in FY2018!

In the short term in may indeed still go up in price, but it doesn't fit anymore in my long term vision.

For updates, insights or suggestions, feel free to post a comment below! emoji 🙂

Disclaimer:

All the information and data expressed in this essay are for informational purposes only and are not to be intended as a financial advice. They may be or prove wrong, with the real possibility of capital and money loss, use them at your own risk.


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