McDonalds Corporation (MCD) Com Stock USD0.01 (CDI)

McDonald's reported first-quarter revenue of $6.2bn, up 4% ignoring the impact of exchange rates, which was in line with market expectations.

Like-for-like sales increased 1.9%, which was below what the market had expected. The US and International Operated Markets divisions both saw growth. The International Developmental Licensed Markets segment was broadly flat as sales continued to be impacted by the war in the Middle East.

Underlying operating profit grew 8% to $2.7bn. This was driven by higher sales and improved margins as costs were closely controlled.

The shares were broadly flat in pre-market trading.

Our view

McDonald's first-quarter results were a mixed bag as tough comparisons and conflict in the Middle East held the business back. 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 the region.

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% at the last count means the vast majority of profit 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. Operating margins rose year-on-year and are 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 brand strength remains as strong as ever and improvements in the online service, delivery and drive thru should help keep customers coming back for more. The valuation is now below the long-term average and doesn't look too demanding. But there could be some bumps in the road ahead, especially as the conflict in the Middle East continues and consumer spending remains under pressure.

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