Morningstar | Velocity Drivers, Franchisee Alignment, and Technology Investments Reinforce McDonald's Growth Story
U.S. comps of 4.5% were the clear highlight from wide-moat McDonald's first-quarter update, as it not only indicates share gains but also provides us with several takeaways regarding current strategies. First, McDonald's velocity drivers--including Experience of the Future (EOTF), digital menu boards, mobile order, and delivery--are resonating with consumers. With more than half of the U.S. now having adopted these velocity drivers, remodel downtime continuing to moderate, and potential upside from the recently acquired personalization/decision logic company Dynamic Yield, we see a path to at least 4% comps for McDonald's U.S. this year. Second, McDonald's and its franchisees appear to better aligned than they were last year, which we attribute to a shift from national to local advertising (which helped to drive "meaningful" contribution from breakfast) and greater flexibility over EOTF investment timing. This development should assuage any concerns about franchisee unrest and supports the current comp trajectory beyond 2019. Lastly, speed of service and menu streamline efforts are also working, which will be important for throughput as aforementioned initiatives accelerate.Taken together, we expect global comps to come in above the high end of our previous 3%-4% target (including 4% in the U.S.), with three points-plus from price/menu mix/bundling and a point in transaction growth. While labor cost inflation, foreign currency, depreciation tied to EOTF remodels, and reduced franchising gains will limit margin expansion, we still expect high-single-digit EPS growth in 2019 (versus $7.54 posted in 2018) through operating expense leverage and ongoing G&A reductions.
We're planning a 5% increase to our $195 fair value estimate due to more optimistic near-term sales estimates. While we see shares as slightly undervalued, we continue to believe McDonald's current initiatives should keep it ahead of industry trends while offering protection from cyclical downturns.
McDonald's franchises and operates McDonald's restaurants. The company's menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, fries, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafe beverages and other beverages. The company's restaurants in the United States and various international markets provide a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes. The restaurants also sells a variety of other products during limited-time promotions
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