This article is a follow up to our previous posting: “Is McDonald's a Good Investment?, in which MarketConsensus rated McDonald’s stock as a HOLD, but a potential future BUY if the US economy improves faster than expected.
In addition to ample opportunities for international growth, MCD has extremely strong brand-name recognition, unparalleled opportunities of scale, and a franchise system that's been perfected down to an art form. All of these are tremendously favorable catalysts for the company's future.
The company has established itself as the leading fast-food restaurant chain in nearly every global market that it operates in, except for China. But even there, it plans to increase its footprint significantly this year by opening an additional 300 new locations in 2013, taking the number of stores to 2,000. Given that the Chinese government is making concerted efforts to grow the domestic economy, this step will be a great catalyst to fueling future growth for the company.
But being the dominant player in the market comes with a price, as Wendy's and Burger King have shown. They are giving MCD a run for its money, forcing MCD to move to cheaper menu items, lower prices and slash margins. If this "battle for the palate and the wallet" continues, it could prove to be an unfavorable catalyst and take a big bite off Big Mac's profits.
McDonald's has a great franchise model, owning more than 70% of the buildings where their restaurants are housed, and 45% of the land on which the operations sit. This makes for great royalty and rental cash flow. However, given the global financial crisis, bankruptcies are at an all-time high, even among owners of MCD franchises. In addition, soaring energy costs and growing labor unrest could prove to be a headwind against which the company will need to sail through in the next few quarters.
Consumer and regulator perception on obesity is something that has long haunted the fast-food industry. As the biggest player in the sector, MCD often gets saddled with an unfair share of the blame for fueling obesity. Should governments be pressured to bring in new laws to fight this perceived "epidemic", and should they decide to more vigorously regulate fast food, then that could be a negative catalyst for the company.