McDonald’s reported fourth-quarter revenue of $6.4bn, up 3.4% on a like-for-like basis, which was below market expectations. All divisions saw positive growth, with International sales growing the fastest at 4.4%.
Underlying operating profit grew 11% to $2.9bn, ignoring the impact of exchange rates. This was driven by higher sales and improved margins as costs were closely controlled.
Free cash flow improved from $5.5bn to $7.3bn for the full year. Net debt was $32.6bn at year-end.
The group plans to open a net total of more than 1,600 restaurants in 2024. Operating margins are expected to be in the mid-to-high 40% range.
The shares were broadly flat in pre-market trading.
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Our view
McDonald’s quarterly sales growth came in below market expectations, largely due to challenges in the Middle East and China. These issues are likely to persist in the near term, meaning the group’s going to have to keep a tight grip on costs if it wants to help offset weakness in these regions.
While growth wasn’t as fast as most had hoped, the Group’s largely franchised model is an efficient operation, with McDonald’s off the hook for many of the typical restaurant running costs. Cash conversion in excess of 90% means the vast majority of profits feeds into cash for the business to either spend or return to shareholders.
McDonald’s’ strong cash flows give it the headroom to cope with bumps in the road and continue its expansion plans, with 1,600 net restaurant openings expected this year. The bias in openings towards franchised operations should help margins once the stores are running at full pelt. It’s also been spending on revitalising stores, whilst continuing to improve the digital presence.
Operating margins have been robust so far. And efforts to trim the cost base appear to be having the desired effect, with full-year operating margins rising year-on-year and expected to remain in the mid-to-high 40% range. If inflation continues to moderate, we think there is potential to build this out a little further.
McDonald’s is also lugging around a hefty debt pile. Interest costs grew 13% in 2023 as a result of these higher debt balances and interest rates. The group enjoys strong cash generation but given the increased cost of debt, we think paying some of this down should be a priority.
The fast food chain’s convenience transformation is thriving, with improvements in the online service, delivery and drive thru. We think the brand strength remains as strong as ever and recent social media campaigns underline its ability to connect with today’s generation. The valuation has now crept below the long-term average and doesn’t look too demanding. But there could be some bumps in the road ahead, especially as we think consumer spending’s likely to come under further pressure in the coming months.
McDonald’s key facts
- Forward price/earnings ratio (next 12 months): 23.5
- Ten year average forward price/earnings ratio: 22.6
- Prospective dividend yield (next 12 months): 2.3%
- Ten year average prospective dividend yield): 2.7%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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