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McDonalds: Solid Total Returns to 2027-2029

McDonald's (MCD) plans to expand its retail store base by one-fifth over the next few years. This mostly franchised fast-food purveyor aims to lift the global store count to a net 50,000 by 2027, up from the current population of some 41,200, notes Value Line Research.

The plan calls for opening 900 outlets domestically, 1,900 in the International Operating Market (IOM), and 7,000 in the International Developmental Licenses & Corporate (IDL) segment. Note that IOM encompasses 19 markets, inclusive of Australia, Canada, France, Germany, and the United Kingdom. IDL covers 75 markets, including Brazil, China, and Japan.

Business among the three groupings is well-diversified, with the United States, IOM, and IDL representing 41%, 34%, and 25% of retail sales, respectively. The U.S. and IOM account for the bulk of revenues and operating income, both measures being in the 80% range. Sales growth will be further supported by menu enhancement, marketing, digital ordering, drive-thru expansion, and the customer loyalty program.

McDonald's should post annual revenue gains in the high single-digits.

The fast-food giant posted an impressive performance in 2023. The top line was up a strong 10%, while earnings per share jumped an impressive 18% year over year.

Throughout the year, management worked to sustain good revenue momentum by selectively raising prices, maintaining attractive value options on the menu, adding appealing bundled food offerings, adequately funding marketing, methodically expanding the store base, and reconfiguring restaurants to boost service turnover. Such efforts were more than sufficient to overcome the headwind of tightening consumer budgets, given pressures from inflation and higher interest rates.

We believe McDonald’s is well positioned for near-term growth, despite ongoing market challenges.

Since 2019, even with disruptions from the coronavirus pandemic, the company has been able to boost its operating margin by over four points.

Effective day-to-day cost controls and better in-store processes, thanks to technology adoption and building reconfigurations, have helped to strengthen operating leverage. In addition, more closely linking the worldwide store network, via Google Cloud services, holds out the prospect of additional shared best practices and improved productivity and efficiency. All told, annual earnings gains ought to outpace the top-line trend.

Over the next few years, capital spending is projected to ramp higher. Good cash generation should limit reliance on debt funding. Share buybacks likely will continue, at least incrementally. We expect dividend hikes to keep up with advancing earnings. These top-quality shares offer investors solid, well-defined potential total returns to 2027-2029, says analyst David M. Reimer. The 3 to 5-Year Target Price Range: $365.00 - $450.00.

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