Morningstar Report-636d1777e26a17cb579914d7

Morningstar Equity Analyst Report | Report as of 16 Dec 2023 05:15, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 24
McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
287.27 USD 310.00 USD 0.93 210.36 USD Bil Wide 2 Large Blend Low Standard ;;;;;
15 Dec 2023 7 Dec 2023 16:57, UTC 15 Dec 2023 6 Dec 2023 06:00, UTC
Price vs. Fair Value
Fair Value: 310.00

7 Dec 2023 16:57, UTC
400
Last Close: 287.27
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.93 0.90 0.91 1.12 1.07 0.93 Price/Fair Value
5.60 13.95 11.14 27.37 0.42 11.37 Total Return %
Morningstar Rating
Total Return % as of 15 Dec 2023. Last Close as of 15 Dec 2023. Fair Value as of 7 Dec 2023 16:57, UTC.
Contents
Analyst Note (7 Dec 2023) McDonald's: Lifting Intrinsic Valuation on Loyalty, Unit
Business Description
Business Strategy & Outlook (7 Dec 2023) Growth Updates; Shares Slightly Cheap
Bulls Say / Bears Say (7 Dec 2023)
Analyst Note Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023
Economic Moat (7 Dec 2023)
Fair Value and Profit Drivers (7 Dec 2023)
Wide-moat McDonald's investor day left us impressed, with color regarding the firm's loyalty program
Risk and Uncertainty (7 Dec 2023) opportunities, aggressive development targets, and investments in rationalizing redundant expenditures
Capital Allocation (7 Dec 2023) across its global technology stack seeming like investments poised to unlock substantial value for the
Analyst Notes Archive world's largest restaurant brand. We plan to raise our $290 fair value estimate by a high-single-digit
Financials
percentage, attributable to loyalty-enabled comparable store sales increases (3%-4% valuation impact),
ESG Risk
better-than-expected unit growth (4%), and time value (1%).
Appendix
Research Methodology for Valuing Companies
More concretely, the firm's loyalty program has reached an impressive 150 million 90-day active
Important Disclosure
members, driving a 15% uptick in frequency and seeing members spend twice the amount that
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and nonmembers do, or roughly $130 per year, by our estimates. Importantly, we see ample headroom for
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures. growth, with $20 billion in systemwide sales tied to MyMcDonald's rewards representing 15%-16% of
The primary analyst covering this company does not own its stock. the firm's $130 billion guidance for 2023, well behind industry leaders like Starbucks (57% of North
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1 America segment spending) and privately held Panera, whose loyalty members also represent more
Rating.
than half of spending at that banner. McDonald's targets $45 billion in loyalty member spending by
2027 across a base of 250 million active users, figures which we view as attainable when considering its
efforts to sweeten the program with redemption partnerships, app exclusives, early access, and app-less
checkout through social channels.
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Morningstar Equity Analyst Report | Report as of 16 Dec 2023 05:15, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 24
Sector Industry
t Consumer Cyclical Restaurants Pivoting to development, we view corporate efforts toward buildout cost containment, the automation
of backend systems (scheduling, inventory management, order sequencing), and strong comparable
Business Description
McDonald’s is the largest restaurant owner-operator in sales growth as a compelling argument for improving franchisee returns, which validates a step-up in
the world, with 2022 system sales of $116 billion across unit growth guidance. Management now targets 50,000 stores by 2027—up from 40,000 at year-end
more than 40,000 stores and 115 markets. McDonald’s 2022, and 1,100 stores ahead of our pre-event forecast—and we expect to move our estimates into the
pioneered the franchise model, building its footprint
new range.
through partnerships with independent restaurant
franchisees and master franchise partners around the
Business Strategy & Outlook Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023
globe. The firm earns roughly 60% of its revenue from
franchise royalty fees and lease payments, with most of
McDonald's' strategy, as laid out at its most recent investor day in December 2023, emphasizes its
the remainder coming from company-operated stores competitive strengths through an "MCD" framework: relevant marketing, core menu development, and
across its three core segments: the United States, the four Ds: digital, drive-thru, delivery, and development. The firm's approach strikes us as cogent, and
internationally operated markets, and international appears to be meeting the evolving needs of today's restaurant consumer.
developmental/licensed markets.
Considering each pillar in sequence, the firm's marketing creative has recently driven substantial brand
buzz, with the return of the Hamburglar character, a line of Grimace shakes, an adult Happy Meal
promotion, and a world-famous order platform representing some of the firm's recent successes as it
continues to capture global traffic share in a challenging industry environment. Marketing has grown
more focused, with McDonald's emphasizing its core menu properties. The chain generates 65% of
global systemwide sales from its core menu, with an astounding 17 $1 billion brands, from newer
launches like its McCrispy chicken sandwich to longtime anchors like the Big Mac sandwich. We're
impressed by McDonald's' ability to reposition its menu to meet the changing demands of a global
restaurant consumer, with $25 billion in chicken platform sales now rivaling the hamburger chain's beef
platform sales, which is an impressive feat. Finally, McDonald's appears to be executing against its four
"Ds," with its digital sales mix clipping up north of 40% of systemwide sales in its top markets—driven
by its global loyalty base of 150 million members, with the rollout of dual-lane drive-thrus across its
global restaurant estate; a delivery sales mix of 12%-13% of systemwide sales ($16 billion); and with an
uptick in unit development targets, to 50,000 stores by 2027, from 40,000 at year-end 2022.
We foresee market share gains as par for the course in the near term, with the largest global restaurant
chains best-positioned to defray required investments in omnichannel ordering, loyalty programs, and
restaurant modernization across a larger base of systemwide sales, in our view. McDonald's' efforts to
unify its global technology stack and eliminate redundant global functions should further entrench its
edge.
Bulls Say Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

u With a modernized restaurant real estate footprint after $9 billion in remodeling investments,
McDonald’s is well positioned to take advantage of evolving digital ordering habits.

u McDonald's swelling loyalty member base visits 15% more frequently than they did pre-adoption,
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Competitors
McDonald's Corp MCD Yum Brands Inc YUM Chipotle Mexican Grill Inc CMG Restaurant Brands International Inc QSR
Fair Value Fair Value Last Close

310.00 139.00 2,271.47 Last Close
Uncertainty : Low Uncertainty : Low 98.60
Last Close Last Close Fair Value Fair Value
287.27 128.64 1,800.00 93.00
Uncertainty : High Uncertainty : Medium
Economic Moat Wide Wide Wide Narrow

Currency USD USD USD CAD
Fair Value 310.00 7 Dec 2023 16:57, UTC 139.00 15 Aug 2023 20:13, UTC 1,800.00 27 Oct 2023 22:02, UTC 93.00 6 Nov 2023 00:27, UTC
1-Star Price 387.50 173.75 2,790.00 125.55
5-Star Price 248.00 111.20 1,080.00 65.10
Assessment Under Valued 15 Dec 2023 Under Valued 15 Dec 2023 Over Valued 15 Dec 2023 Fairly Valued 15 Dec 2023
Morningstar Rating QQQQ15 Dec 2023 22:16, UTC QQQQ15 Dec 2023 22:16, UTC QQ15 Dec 2023 22:16, UTC QQQ15 Dec 2023 22:53, UTC
Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst Sean Dunlop, Equity Analyst
Capital Allocation Standard Standard Exemplary Standard
Price/Fair Value 0.93 0.93 1.26 1.06
Price/Sales 8.43 5.22 6.62 4.88
Price/Book — — 21.60 7.89
Price/Earning 25.33 24.46 53.89 25.36
Dividend Yield 2.17% 1.88% — 3.00%
Market Cap 210.36 Bil 36.75 Bil 62.46 Bil 31.00 Bil
52-Week Range 236.77—299.35 115.53—143.25 1,344.05—2,346.35 82.61—103.87
Investment Style Large Core Mid Core Large Growth Large Growth
suggesting that the program could prove a multiyear driver of comparable store sales.
u As the low-cost operator in the space, input cost inflation and consumer pressure offer McDonald’s a
chance to gain share in key markets.
Bears Say Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

u Wage inflation, particularly in the U.S., could result in an increase in price competition, additional
investments in automation, and a shift toward relatively cheaper substitutes in the food-at-home
category.
u While improving, low satisfaction scores relative to industry benchmarks could impair the brand if left
unresolved, threatening McDonald’s pricing power if the firm is unable to meet changing customer
demands.
u Sensitivities to sometimes irrational pricing pressure and limited-time offers can pressure results, as
seen during the chicken sandwich wars.
Economic Moat Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023
ß
Low barriers to entry and minimal switching costs render the restaurant industry very competitive,
making it difficult for most operators to develop an economic moat. Those who are able to do so, as we
see it, focus on generating pricing power through a substantially differentiated and recognizable brand
or by developing structurally lower operating costs, generally supported by scale-driven pricing
advantages and leveraged systemwide investments in marketing and technology, while spreading
administrative expenses over a larger revenue base. In our view, McDonald's boasts a wide economic
moat, with pricing power, a healthy network of franchisees, and successful international replication
underpinning its brand intangible asset. We also believe that McDonald's benefits from a durable cost
advantage, with its dominant global scale allowing it to procure food and paper at favorable prices, to
leverage marketing and technology investments across its global footprint, and to secure lower rates
from third-party delivery aggregators. Our wide moat rating implies the assumption that the firm can
continue to earn positive economic returns for the next 20 years. Our adjusted ROIC forecast of 29%
over the decade to come aligns with this view, comfortably exceeding our estimated 7% WACC for the
operator.
With respect to intangible assets, we cite the firm's ability to pass through food and labor cost inflation
to customers, its competitive restaurant-level margins and impressive unit volume, and number-one
quick-service restaurant market share by sales volume in every major market in which it operates (with
the notable exception of China) as the pillars underpinning our wide moat rating. To the first point,
McDonald's U.S. and international developmental/licensed segments saw their average check increase
roughly 5% per year during 2016-19, faster than food inflation (1.3%) and increases in food-away-from-
home pricing (up 2.7%, per USDA data) during that period. While the firm suspended its reporting of
that figure due to temporary store closures during the initial surge of COVID-19, we view 6%-7%
annualized same-store sales growth and market share gains between 2019 and 2023 as reflective of a
competitively advantaged brand, despite margin compression amid an unprecedented surge in input
costs, and expect a full (if protracted) recovery to prepandemic profitability. The firm's ability to increase
its industry traffic share despite 10%-plus price increases in 2023 further validates our view.
Turning to restaurant-level economics, we believe that the attractiveness of a brand to franchisees is

driven by average unit volume, restaurant-level margins, systemwide stability, and franchise return on
investment. McDonald's scores well across the board, with average sales per U.S. franchised restaurant
of $3.6 million in 2022, meaningfully outperforming publicly traded peers in the hamburger space
(Burger King saw $1.4 million, Wendy's $1.9 million, and Sonic $1.6 million, per Restaurant Business'
2022 top 500 report and our calculations). Given that restaurants feature high incremental operating
margins, we estimate that higher sales lead to meaningfully better store-level operating income than
many of McDonald's direct competitors, a view corroborated by franchise disclosure documents after
adjusting for measurement comparability. We conservatively estimate that McDonald's franchisees earn
midteens cash on cash returns (annual operating income as a proportion of total cash outlay), with
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category peers earning midsingle digits to midteens, underpinning the firm's unit development
aspirations and increasing its allure in the eyes of franchisees. Our view is corroborated by
management's guidance for accelerating near-term unit growth, with the firm now targeting 50,000 net
stores by 2027, an increase of roughly 10,000 from its 40,000 unit base at the end of 2022. This
encouragingly reflects a return to growth in the firm's home U.S. market.
Finally, with its systemwide sales of $116 billion in 2022, we estimate that McDonald's attracted roughly
4% of global consumer food-service sales, approximately doubling closest competitor Yum Brands' share
and illustrating the firm's success in international concept replication. With a footprint spanning 115
countries and a 55-year international operating history, McDonald's has demonstrated brand strength
across geographies, tastes, and cultures. While hiccups along the way have led to philosophical
changes in approach, we're impressed by McDonald's ability to transfer winning innovations across the
system, as seen with the introduction of Spicy Chicken McNuggets, which were initially developed in
the Chinese market. The pace of innovation should only accelerate moving forward as the firm has
migrated its international franchisees onto a more homogeneous technology stack, and we view
investments in digital innovation, loyalty, new format stores, and the firm's chicken platform as evidence
that management is taking appropriate strategic steps to position the firm for the ongoing evolution of
the restaurant industry.
Turning to the firm's cost advantage, we believe that McDonald's commanding scale allows it to benefit
from volume discounts in food and paper procurement from food distributors, fixed-cost leverage over
general, administrative, marketing and technological expenditures, and from lower rates on third-party
aggregator platforms. With respect to procurement relationships, QSR operators primarily value cost
and on-time delivery. Larger case volume per store helps food distributors manage delivery costs per
case, particularly with expensive last-mile delivery, while in-house technological capabilities offer chains
the advantage of paying for food products without added services such as inventory management,
marketing strategies, or other consulting offerings. Larger sales volume and geographic reach allow the
biggest national restaurant operators to benefit from purchasing leverage, with food distributors willing
to accept lower margins in exchange for higher operating income (margin dollars).
While marketing and technology spending are easy to overlook, the benefits of scale are important
when building an international brand. With a 4% marketing royalty and $116 billion of 2022 systemwide
sales, McDonald's advertising cooperatives likely maintain around a $4.6 billion marketing kitty to
coordinate promotions, like the firm's popular Travis Scott and J Balvin “famous” meals, Cactus Cactus
Plant Flea Market toys, limited time offers, or top-of-funnel brand marketing through conventional print,
radio, and digital advertising (though we note that international master franchisees get to set their own
marketing rates, so our calculated figure is just an estimate). More concretely, strong brand awareness
help new units achieve normalized average unit sales more quickly, improving cash payback periods
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and, by extension, lenders' and franchisees' appetites to partner with the burger chain.
On the technology side, we've seen substantial improvements, with the company rolling out a
scheduling software (RGM Boss) in its China market that unlocked 30 basis points of restaurant
profitability; investing in inventory management and easy RFID tracking software; standardizing
functions like finance and human resources data and best practices through its global business services,
or GBS, initiative; and investing heavily in its MyMcDonald's loyalty program. With a projected
systemwide sales base of $130 million in 2023 and north of 41,000 global restaurants, McDonald's finds
itself in a unique position, where it can derive a return on technology investments that provide even a
negligible lift to comparable sales or restaurant margin, an edge that smaller peers cannot replicate. As
the firm's base of loyalty program customers continues to grow (from an estimated 8% penetration in
2023 to 14% by 2024) and as McDonald's' ability to better leverage its unparalleled access to customer
ordering behavior continues to improve, we only expect the firm's ability to leverage its digital learnings
to accelerate, providing a structural edge in pricing decisions, personalization, and even restaurant site
selection. In truth, McDonald's technology prowess is reflective of its cost advantage but underpins its
brand intangible asset, with effective technology implementation set to improve both the firm's top and
bottom lines in a way that peers are unlikely to be able to emulate.
An underappreciated manifestation of the firm's cost edge is reflected in McDonald's' ability and
willingness to shore up the health of its franchise system, beyond pure unit economics, in our view.
With the firm's commitment to selectively and temporarily shore up franchisee profitability in Europe (to
the tune of $100 million-$150 million in 2023) amid an ongoing surge in food cost inflation, we see
traces of a competitive advantage that only the largest global restaurant operating companies could
replicate, with support serving to avoid costly unit closures and as a proof point that the firm is
committed to defending the profitability of its franchisees. It also allows franchisees to invest in long-
term customer relationships, underpricing inflation and growing share of industry traffic as consumers
increasingly seek value for their money. Rent holidays in 2020 amid the outbreak of COVID-19 served a
similar end and helped catalyze the impressive string of subsequent results that have solidified the
firm's commanding position in the global restaurant hegemony.
Finally, though restaurants and third-quarter operators are notoriously opaque regarding contract
structures, we believe that McDonald's pays lower commissions (low double digits) to aggregators like
DoorDash and Uber Eats than do smaller peers, and far lower than the 30% headline rate. As a relatively
early entrant in the space, partnering with Uber Eats in 2017, McDonald's likely grandfathered in a
lower commission, while a subsequent deal with DoorDash in 2019 occurred as pricing competition
reached its zenith. Both were renegotiated as global deals in 2021. Management commentary from
delivery firms supports this view, with QSR firms widely viewed as loss leaders—necessary to attract
new consumers, but materially less profitable than independent restaurants and smaller brands, which
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rely on the aggregators for demand generation.
Fair Value and Profit Drivers Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023
We've raised our fair value estimate for McDonald's to $310 from $290 after digesting the firm's investor
day presentation. Particularly encouraging, in our view, was preliminary data from the firm's loyalty
program, with guidance suggesting that the chain should benefit both from an uptick in guest
frequency and per-user spending even as the program increases to 250 million users in 2027, from 150
million today. Elsewhere, McDonald's ability to drive outsize comparable store sales growth continues to
distinguish its economic model from competitors, helping underpin accelerating unit development
aspirations. The firm now targets 50,000 global net stores by 2027, an increase of 10,000 units from
40,000 at the end of 2022 and a benchmark that we view as attainable. On balance, the comparable
sales lift from the firm's loyalty program, an incremental 1,100 stores from our prior forecast, and a
modest bump from time value underpin our high-single-digit percentage intrinsic valuation increase.
We've been impressed by the firm’s ability to drive robust comparable-store sales growth as it navigated
a global pandemic, digital transformation, and the divestiture of its largely company-owned Russian
market. With 30% same-store sales growth relative to 2019 (a bit shy of 7% annualized), we believe that
McDonald's has taken meaningful market share, and we continue to expect near-term outperformance
as the firm's value-oriented fare is uniquely well positioned to cater to a strapped consumer. That said,
while McDonald's has been able to pass along a meaningful portion of cost increases (raising prices
roughly 10% in the U.S. from a year ago), it hasn't been able to fully defray pressure without outrunning
its core customer, given that input costs and hourly labor have swelled by roughly 25% relative to
February 2020, and we don't expect a full return to prepandemic restaurant margins until 2025, given
macroeconomic pressure.
In our view, McDonald's has had the luxury of investing through the cycle, while smaller, less capitalized
peers curtailed investments and struggled to defray rising input costs, affording an opportunity to
continue to take market share over the medium term, particularly in markets where independent
restaurants maintain higher penetration. Driven by the firm's young loyalty program, surging digital
sales volumes, and unit development, we expect the burger giant to continue to capture wallet share
abroad, with our forecasts calling for average annual sales growth of 7.8% and 11.7% through 2027 in
the internationally operated markets and internationally developed and licensed segments, respectively.
Our operating margin assumptions are largely driven by operating leverage and a favorable mix shift,
with McDonald's selling, general, and administrative expenditures falling to just north of 10% of sales in
2032 from a high-water mark of 13.3% in 2020, with depreciation normalizing after extensive
investments in restaurant remodeling.
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Risk and Uncertainty Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023
Consistent with our quantitative methodology, we believe that McDonald's warrants a Low Morningstar
Uncertainty Rating. With a heavily franchised structure and recession-resistant value proposition, the
firm's cash flow sensitivity to macroeconomic health appears relatively muted.
While restaurants saw positive momentum across the board during 2021, steep inflation across all of
restaurants' prime costs—food, labor, and utilities—underpinned a more challenging 2022. McDonald's
looks to us like one of the best positioned operators in the industry moving forward, but we note that
consumer pressure tends to drive a modest mix-shift toward relatively cheaper food at home (grocery)
options, which could blunt sales momentum and pricing power during the year to come. While gradual
input cost increases can be offset by investments in automation and higher prices, larger jumps can
prove margin dilutive as we estimate a breakpoint around 3% for annual menu price increases (in
normal years), after which likely traffic and unit volume contractions drive operating deleverage and
lower restaurant margins—exactly what we saw industrywide in 2022.
Considering environmental, social, and governance factors, we view human capital as the biggest risk
for McDonald's, consistent with most restaurant operators in our coverage. More concretely, operators
will be forced to palate higher minimum restaurant wages in California and a reworked NLRB joint
employer rule, with the effect of swelling labor costs and oversight responsibilities. The firm continues
to navigate sticky inflation outside the sunshine state, as well.
Finally, the firm's ability to appeal to changing consumer demands remains integral to its success, with
brand strength demonstrated by pricing power (a big part of average check) and guest traffic.
Deterioration of the firm's brand cachet could slow unit growth, soften restaurant-level profitability, and
lead to declining attractiveness for potential franchisees.
Capital Allocation Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

We assign McDonald’s a Standard Morningstar Capital Allocation Rating. Our analysis evaluates what
we determine to be the three key facets of management decision-making from the perspective of
shareholders: balance sheet strength, investment efficacy, and distributions. Our Standard rating results
from a sound balance sheet, fair investment strategy, and assessment of shareholder distributions as
appropriate.
With respect to the balance sheet, McDonald’s benefits from low systematic risk, with staggered debt
maturities and very low net debt/enterprise value offsetting higher leverage (3-3.5 times EBITDA is
targeted, historically). A highly franchised operating model reduces cash flow uncertainty, while the
firm's real estate portfolio offers meaningful tangible assets, an unusual characteristic for heavily
franchised restaurant operators that assuages many debtholder concerns.
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We view investment decisions as fair, with returns on invested capital increasing throughout our explicit
forecast period as the firm benefits from operating leverage and refranchising. The firm’s decision to
extensively refranchise its U.S. store base during 2015-18 strikes us as clever, bringing the percentage
of franchised stores to 95% from 81% in the segment and taking $250 million out of the general and
administrative cost base. Thus far, the firm has walked the line well between operating a heavily
franchised, decentralized system and continuing to invest in store performance and unit economics,
which represents a key investment risk in the space among franchisors. Recent technology investments
are encouraging, with diversity in ordering options, customization, and targeted promotions likely
representing table stakes in the restaurant industry moving forward. The firm’s ability to cultivate an
attractive end-to-end customer experience will be crucial, with increased touchpoints across systems
offering McDonald’s access to previously inaccessible data regarding ordering patterns, customer
trends, and menu preferences by demographic. Whether or not the firm is successfully able to leverage
such data remains to be seen, and while we maintain our confidence in the management team’s ability
to execute initiatives that were in place before the pandemic, our “neutral” strategy rating testifies to
our wait-and-see approach regarding the firm’s willingness to make bold and value-accretive
investment decisions as we emerge from the shadow of the pandemic. By our estimates, the firm's
capital expenditure budget should continue to fall gradually as a percentage of system sales over time
(we forecast 1.6% in 2023), but remains sufficient to support company-owned unit growth, strategic
investments, and periodic restaurant remodeling.
Finally, we assess shareholder distributions as appropriate. We expect the firm's dividend to grow at a
low-double-digit clip over the next three years, with a payout ratio between 50%-55%, and model more
than $27 billion in shareholder returns over that period. As long as buybacks are executed while the firm
trades below our fair value estimate, they represent an attractive use of capital. We believe that the
company has done a laudable job avoiding frivolous spending and value-dilutive investments,
maintaining attractive returns on invested capital and focusing unit expansion in the more attractive
international-operated and international developed/licensed markets. The firm's position as a landlord
and willingness to buy the sites beneath its stores has imposed a degree of capital discipline for
McDonald's that is uncommon elsewhere in the industry.
Analyst Notes Archive
McDonald’s Earnings: Value Leader Performs Ably Despite Turbulent Backdrop; Shares Attractive
Sean Dunlop, CFA, Equity Analyst, 30 Oct 2023
Wide-moat McDonald's continues to prove resilient despite widespread consumer pressure, with its
strong value positioning, investments in core menu development, and digital acuity driving another
quarter of healthy top-line performance. The firm's $6.69 billion in sales and $3.17 in diluted EPS
comfortably edged our respective $6.29 billion and $2.70 EPS estimates, with nearly 9% global
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comparable store sales growth attesting to broad-based strength across the firm's 115-plus global
markets. While results comfortably exceeded our quarterly forecasts, we expect to increase our $285
intrinsic valuation by just a low-single-digit percentage as we balance strong results, time value, and
worse-than-expected traffic (slightly negative). More concretely, we expect to pull down our 2024
comparable store sales estimates by a couple of points across regions as the competitive environment
intensifies, with competition for the breakfast daypart—roughly 25% of McDonald's sales—and for
lower-income clientele remaining intense. Shares strike us as attractive.
The firm continues to fire on all cylinders, making important strides across each pillar of its "MCD"
strategic framework. On the marketing side, McDonald's launched its "as featured in" campaign,
celebrating the brand's appearance in various media outlets over the past 20 years. Regarding menu
development, it launched a McSmart value menu, in response to customer demand, and the chain rolled
out a popular McCrispy deluxe sandwich in the U.K. Turning to digital, drive-thru, and delivery, the firm
now sees 40% of sales come through digital channels in its top six markets, driven by a 57-million-
member 90-day active loyalty member base.
On balance, we have few qualms with the firm's results and continue to view double-digit medium-term
EPS growth as attainable between 3%-4% comparable sales growth, mid-single-digit store growth
(nearly 4% annually through 2027), margin expansion, and annual share repurchases (averaging 3%).
Taking the Restaurant Industry's Pulse: Opportunities Arise as Slowing Sales Drive Correction Sean
Dunlop, CFA, Equity Analyst, 5 Oct 2023
The restaurant industry looks cheap to us for the first time since fall 2022, with the recent market
correction creating a buying opportunity for long-term investors. Our coverage trades at a 7% cap-
weighted discount to our intrinsic valuations, with wide-moat companies like Yum Brands, Starbucks,
and McDonald's looking unusually alluring, each trading at a 10%-12% discount to our respective $139,
$103, and $285 fair value estimates. We recognize that slowing same-store sales pose a near-term risk,
but believe that large, quick-service operators with scale-driven cost advantages and strong digital
touchpoints look poised to capture market share in this dynamic environment. Restaurants are more
resilient than many investors realize, with companies that outperform on the basis of "value for the
money" like McDonald's and wide-moat Chipotle even posting comparable-store sales growth over the
course of the 2007-09 downturn. While we expect consumer spending to slow in 2024, we continue to
maintain that the U.S. will avoid an outright recession and believe that investors seeking consumer
cyclical exposure would do well to consider turning toward the restaurant industry at current prices.
More concretely, comparable store sales growth over the most recent quarter slowed to a 5.5%
annualized clip since 2019 (prepandemic) across our U.S. restaurant coverage, comfortably ahead of
historical averages but representing a meaningful step-down from the 6.8% result a quarter ago. Traffic
has declined industrywide for the past 16 months (Revenue Management Solutions) and an increasingly
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price-sensitive customer will likely drive an uptick in industry promotional activity. While we
acknowledge market concerns regarding operators' ability to drive incremental price increases ahead of
inflation in the current environment, we believe that disinflationary (and in some cases deflationary)
commodity costs and an easing labor market should defend margins.
McDonald's Earnings: Strong Marketing and Compelling Value Positioning Drive Supersized
Earnings Sean Dunlop, CFA, Equity Analyst, 27 Jul 2023
Wide-moat McDonald’s continues to fire on all cylinders, with $3.17 in adjusted diluted EPS and $6.5
billion in sales blowing past our $2.67 and $6.4 billion estimates, respectively. While we agree with
management that the firm is likely to see macroeconomic pressure drive slowing sales growth over the
second half of 2023 (and likely into 2024), we remain impressed with the firm’s ability to balance
consumer desire for value, franchisee cash flow, and corporate-level profitability. The burger chain
posted double-digit same-store sales growth in all three operating segments, with consolidated global
comp growth of 11.7% suggestive of meaningful market share gains. As we digest outsize quarterly
earnings and factor in an attractive near-term growth roadmap—driven by the firm’s 52 million global
loyalty member base, a quickly swelling digital sales mix, success with core menu innovation, and
strong value positioning—we expect to raise our $260 fair value estimate by a high-single-digit
percentage, leaving shares looking fairly valued. The lift can be largely attributed to volume-driven
operating leverage and an uptick in midterm unit development, catalyzed by positive franchisee cash
flow during the quarter despite ongoing inflationary pressure.
We believe that McDonald’s is uniquely well positioned to navigate an environment marked by

consumer check management and traffic declines, with the firm’s value-oriented fare driving positive
traffic as full-service and fast casual competitors trade into the fast food category. The firm’s
procurement leverage, attributable to $123 billion in trailing 12-month systemwide sales, allows it to
offer its product at attractive price points with equal or better margin performance than its fast food
competitors. We believe that this cost edge should allow McDonald’s to better cater to a value-sensitive
restaurant customer in the current environment than its peers, perpetuating near-term market share
gains.
Restaurant Stocks Look Pricey As Demand Headwinds Remain Underappreciated Sean Dunlop, CFA,
Equity Analyst, 18 Jul 2023
Restaurant stocks look expensive as we take the industry's pulse, with names in our coverage trading at
a market-cap-weighted 10% premium to our intrinsic valuations. While demand has held up nicely to
date, we're seeing weak spots, with persistent declines in traffic and items per check suggesting price-
conscious consumers and a more challenging pricing environment to come. Nominal same-store sales
growth remains healthy, up around 5.7% industrywide over the past three months (RMS data), but
traffic (down 1.4%) and items per check (down 3.7%) remain points of concern. We expect slowing sales
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momentum into the first half of 2024, resulting in a more promotional environment for the industry and
a three- to four-year route to normalized restaurant-level profitability. The industry's bargain bin looks
sparse, but we see modest upside in Wendy's and Starbucks shares, which trade at 6% and 2%
discounts to our $23 and $104 fair value estimates, respectively.
There are certainly positive takeaways from the most recent quarterly data, with wage growth slowing
to 5%-6% a year in leisure and hospitality and with commodity costs clocking in between deflationary
and disinflationary depending on restaurants' commodity baskets (median producer prices are projected
to fall nearly 6.5% in 2023, according to the U.S. Department of Agriculture). Therefore, we believe
restaurant margin performance likely bottomed during fourth-quarter 2022 for operators in our
coverage, with sticky menu price increases and easier annual comparisons for expense growth
providing near-term tailwinds. Nevertheless, as demand softens and the industry's promotional
environment intensifies, we expect little incremental improvement over the rest of 2023, underpinning a
challenging near-term operating environment for restaurateurs. We continue to view firms with strong
pricing power, heavily franchised systems, and strong digital platforms as best positioned to outperform
in the current environment.
McDonald's Earnings: Raising Our FVE on Resilient Consumer and Development Runway; Shares
Expensive Sean Dunlop, CFA, Equity Analyst, 25 Apr 2023
We plan to raise our fair value estimate for wide-moat McDonald's by a high-single-digit percentage
due to resilient comparable store sales and a near-term uptick in unit growth, but shares continue to
look expensive even relative to our revised valuation.
Walking through first-quarter results, the firm posted $5.9 billion in sales and $2.63 in adjusted diluted
earnings per share, aligning fairly closely with our own $5.9 billion and $2.52 forecasts, respectively.
More importantly, that strength was broad-based, with 12.6% comparable store sales growth across all
segments attesting to both McDonald's attractive value positioning and secondarily to improving
customer satisfaction metrics, collectively driving a mid-single-digit percentage lift in comparable guest
count despite traffic declines industrywide. Between a value-focused menu, competitive digital
channels (now accounting for 40% of sales in the firm's top six markets), and a modernized real estate
footprint, we believe that McDonald's is extremely well positioned to outperform its competitive set
against a difficult macroeconomic backdrop—underpinning our own forecasts for large, chained
operators in our coverage to capture 200 basis points of U.S. market share over the half decade to come.
Our valuation change is attributable to surprisingly durable comparable store sales momentum and a
stronger near-term development outlook. To this effect, we're raising our 2023 same-store sales
forecasts in the U.S., internationally operated, and international licensed segments to 8.2%, 7.5%, and
8.1%, respectively, against prior forecasts of 5.4%, 6.9%, and 4.9%, despite projected softness in the
second half of 2023. As it pertains to development, we're raising our annual net unit growth estimate to
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3.9% from 3.7%, with 31% cumulative same-store sales growth relative to the comparable pre-COVID-19
period (7% annualized) earning McDonald's the right to accelerate growth in underpenetrated
international markets.
We See Limited Opportunities and Waning Pricing Power Ahead for Restaurants in 2023 Sean
Dunlop, CFA, Equity Analyst, 17 Apr 2023
The restaurant industry has proven surprisingly resilient despite stout macroeconomic headwinds, but
between normalizing consumer spending patterns, a widening value gap with the grocery channel, and
early signs of price sensitivity, we believe that 2023 is shaping up to be challenging. Despite early
indications of a strong first quarter, we continue to expect a softer second half of the year, limiting near-
term margin recovery as restaurants are reluctant to outprice their core customer. To this effect, traffic
and items per check have declined in each of the past 10 months industrywide—through February
2023—and we continue to view exclusively price-driven comparable store sales growth as a tenuous
long-term strategy. We sport a carb-heavy value menu in the industry, with wide-moat Domino's and
narrow-moat Toast representing our top picks, trading at 16% and 18% discounts to our $397 and
$21.50 fair value estimates, respectively.
Same-store sales growth has remained strong, clocking in at 5% annually for our coverage during the
fourth quarter—though we note that the print represents the second straight quarter of decelerating
momentum, perhaps pointing to fissures in consumer willingness to pay more and receive less in dining
out occasions. While sales have been robust, mid-20% inflation in both food costs and hourly labor since
February 2020 leave restaurant margins about 400 basis points below our long-term forecasts,
suggesting a protracted route to recovery. In our view, the best-positioned operators continue to be
those with brand-driven pricing power, heavily franchised systems, and strong technology platforms.
While we expect normalizing near-term demand, with consumers typically shifting spending toward the
grocery channel during periods of economic pressure, we note that falling producer prices and slowly
easing labor markets provide key offsets to slowing top-line momentum in the industry, suggesting that
restaurant margins may have found a bottom. K
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Competitors Price vs. Fair Value
Yum Brands Inc YUM
Fair Value: 139.00

15 Aug 2023 20:13, UTC
200
Last Close: 128.64
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
1.02 0.92 1.03 1.18 1.01 0.93 Price/Fair Value
14.40 11.41 9.64 29.75 -6.12 2.33 Total Return %
Morningstar Rating
Total Return % as of 15 Dec 2023. Last Close as of 15 Dec 2023. Fair Value as of 15 Aug 2023 20:13, UTC.
Chipotle Mexican Grill Inc CMG
Last Close: 2,271.47

2000 Fair Value: 1,800.00
27 Oct 2023 22:02, UTC
1500 Over Valued

Under Valued
1000
500
0
2018 2019 2020 2021 2022 YTD
1.02 1.25 1.39 1.34 0.89 1.26 Price/Fair Value
49.39 93.87 65.65 26.07 -20.64 63.71 Total Return %
Morningstar Rating
Total Return % as of 15 Dec 2023. Last Close as of 15 Dec 2023. Fair Value as of 27 Oct 2023 22:02, UTC.
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Restaurant Brands International Inc QSR
Last Close: 98.60

200 Fair Value: 93.00
6 Nov 2023 00:27, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.87 0.87 0.91 0.91 1.00 1.06 Price/Fair Value
-4.66 19.79 -2.61 2.00 17.87 15.13 Total Return %
Morningstar Rating
Total Return % as of 15 Dec 2023. Last Close as of 15 Dec 2023. Fair Value as of 6 Nov 2023 00:27, UTC.
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Morningstar Historical Summary

Financials as of 30 Sep 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 28 27 25 25 23 21 21 19 23 23 19 25
Revenue Growth % 2.0 -2.4 -7.4 -3.1 -7.3 -6.9 0.5 -10.1 20.9 -0.2 10.6 7.5
EBITDA (USD Bil) 10.32 9.59 8.75 9.27 10.86 10.28 10.76 9.11 12.18 10.90 10.49 13.61
EBITDA Margin % 36.7 35.0 34.4 37.6 47.6 48.4 50.3 47.4 52.5 47.0 54.9 54.4
Operating Income (USD Bil) 8.52 7.97 7.35 7.82 8.39 8.63 8.95 7.21 9.87 10.34 8.91 11.51
Operating Margin % 30.3 29.0 28.9 31.8 36.8 40.6 41.9 37.5 42.5 44.6 46.7 46.0
Net Income (USD Mil) 5,586 4,758 4,529 4,687 5,192 5,924 6,025 4,731 7,545 6,177 6,430 8,333
Net Margin % 19.9 17.3 17.8 19.0 22.8 27.9 28.2 24.6 32.5 26.7 33.7 33.3
Diluted Shares Outstanding (Mil) 1,006 986 945 861 816 786 765 750 752 741 734 734
Diluted Earnings Per Share (USD) 5.55 4.82 4.80 5.44 6.37 7.54 7.88 6.31 10.04 8.33 8.76 11.34
Dividends Per Share (USD) 3.12 3.28 3.44 3.61 3.83 4.19 4.73 5.04 5.25 5.66 4.56 6.08
Valuation as of 30 Nov 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 3.5 3.3 4.4 4.3 6.0 6.6 7.3 8.5 8.9 8.4 8.0 8.3
Price/Earnings 17.5 18.5 25.6 22.9 24.9 26.9 25.9 32.8 27.6 33.2 24.3 24.9
Price/Cash Flow 13.8 13.1 17.0 16.2 26.9 21.4 19.6 26.2 23.8 25.0 22.2 22.2
Dividend Yield % 3.22 3.5 2.91 2.97 2.23 2.36 2.39 2.35 1.96 2.15 2.31 2.21
Price/Book 6.3 6.6 12.9 -61.3 -39.4 -20.0 -17.2 -18.9 -35.2 -29.3 -38.2 -42.2
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 30 Sep 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 15.5 13.4 12.6 13.6 16.0 17.8 15.0 9.5 14.2 11.9 — 16.6
ROE % 35.7 33.0 45.4 191 — — — — — — — —
ROIC % 20.1 17.7 16.8 19.2 — — — — — — — —
Asset Turnover 0.8 0.8 0.7 0.7 0.7 0.6 0.5 0.4 0.4 0.4 — 0.5
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 46.9 53.8 77.3 — — — — — — — — —
Equity/Assets % 43.7 37.6 18.7 — — — — — — — — —
Total Debt/EBITDA 1.4 1.6 2.8 — — — — — — — — —
EBITDA/Interest Expense 19.5 16.6 13.7 10.5 11.8 10.5 9.6 7.5 10.3 9.0 10.5 10.3
Morningstar Analyst Historical/Forecast Summary as of 07 Dec 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 31 Dec 2022 2021 2022 2023 2024 2025
Price/Sales 8.6 8.3 8.1 7.7 7.2
Revenue (USD Mil) 23,223 23,182 25,643 27,219 28,945 Price/Earnings 28.8 26.1 24.5 23.5 20.8
Revenue Growth % 20.9 -0.2 10.6 6.2 6.3 Price/Cash Flow — — — — —
EBITDA (USD Mil) 11,669 12,549 13,850 14,731 16,010 Dividend Yield % 2.0 2.1 2.2 2.3 2.6
EBITDA Margin % 50.2 54.1 54.0 54.1 55.3 Price/Book -43.8 -32.5 -46.6 -38.5 -30.3
EV/EBITDA 20.9 18.9 18.4 17.3 15.9
Operating Income (USD Mil) 10,356 9,371 11,863 12,553 13,623
Operating Margin % 44.6 40.4 46.3 46.1 47.1
Net Income (USD Mil) 6,990 7,485 8,574 8,747 9,575
Net Margin % 30.1 32.3 33.4 32.1 33.1
Diluted Shares Outstanding (Mil) 752 741 733 716 694
Diluted Earnings Per Share(USD) 9.30 10.10 11.71 12.21 13.80
Dividends Per Share(USD) 5.34 5.52 6.23 6.68 7.58
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (42.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 42.5 risks driven by their business model
42.5
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 39.8 Medium
2 0 55+ specified at the company level
Unmanageable Risk 2.7
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 39.8 ESG risks through its commitments and actions
42.0%
– Managed Risk3 16.7 Average
u Management assesses a company's efficiency on ESG
Management Gap4 23.1 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 25.8 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

25.76
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Dec 06, 2023. Highest Controversy Level is as of Dec 08,
2023. Sustainalytics Subindustry: Restaurants. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 42.0% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Dec 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
McDonald's Corp 42.5 | Medium 0 55+ 42.0 | Average 100 0 25.8 | Medium 0 40+
Yum Brands Inc 41.7 | Medium 0 55+ 52.9 | Strong 100 0 21.0 | Medium 0 40+
Chipotle Mexican Grill Inc 40.3 | Medium 0 55+ 52.1 | Strong 100 0 20.7 | Medium 0 40+
Restaurant Brands International Inc 43.7 | Medium 0 55+ 51.0 | Strong 100 0 22.8 | Medium 0 40+
— —|— 0 55+ —|— 100 0 —|— 0 40+
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Appendix
Historical Morningstar Rating
McDonald's Corp MCD 15 Dec 2023 22:16, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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Yum Brands Inc YUM 15 Dec 2023 22:16, UTC
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Chipotle Mexican Grill Inc CMG 15 Dec 2023 22:16, UTC
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Restaurant Brands International Inc QSR 15 Dec 2023 22:53, UTC
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QQQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ
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Alternative location for disclosure can be found https:// our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
pspdf-stg.morningstar.com/v1/disclosure feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
tion of a company’s future cash flows, resulting from our Stage II: Fade
cost of capital (or WACC). Without a moat, profits are
analysts’ research. Analysts create custom industry and The second stage of our model is the period it will take
more susceptible to competition. We have identified five
company assumptions to feed income statement, balance the company’s return on new invested capital—the re-
sources of economic moats: intangible assets, switching
sheet, and capital investment assumptions into our glob- turn on capital of the next dollar invested (“RONIC”)—to
costs, network effect, cost advantage, and efficient scale.
ally standardized, proprietary discounted cash flow, or decline (or rise) to its cost of capital. During the Stage II
DCF, modeling templates. We use scenario analysis, inde- Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
pth competitive advantage analysis, and a variety of other more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
analytical tools to augment this process. Moreover, we for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
think analyzing valuation through discounted cash flows those in which we have very high confidence that excess length of the second stage depends on the strength of
presents a better lens for viewing cyclical companies, returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
high-growth firms, businesses with finite lives (e.g., likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
mines), or companies expected to generate negative a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
earnings over the next few years. That said, we don’t dis- value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
miss multiples altogether but rather use them as support- see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
ing cross-checks for our DCF-based fair value estimates. cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
We also acknowledge that DCF models offer their own new invested capital (RONIC), and the number of years
challenges (including a potential proliferation of estim- When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
ated inputs and the possibility that the method may miss whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
shortterm market-price movements), but we believe these stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
negatives are mitigated by deep analysis and our financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
longterm approach. text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
Morningstar’s equity research group (”we,” “our”) be- cumulative or midcycle basis. If we deem the probability second stage.
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
future cash flows it can generate. The Morningstar Rating the company as possessing an economic moat. Stage III: Perpetuity
for stocks identifies stocks trading at a discount or premi- Once a company’s marginal ROIC hits its cost of capital,
um to their intrinsic worth—or fair value estimate, in 2. Estimated Fair Value we calculate a continuing value, using a standard per-
Morningstar terminology. Five-star stocks sell for the Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
biggest risk adjusted discount to their fair values, where- firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
as 1-star stocks trade at premiums to their intrinsic worth. on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
assessment of the firm’s economic moat, (2) our estimate longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
of the stock’s fair value, (3) our uncertainty around that firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
fair value estimate and (4) the current market price. This creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
process ultimately culminates in our singlepoint star rat- value of expected future cash flows. Because we are
ing. Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
available to provide a return to all capital providers—we
1. Economic Moat discount future cash flows using the WACC, which is a
Stage I: Explicit Forecast
The concept of an economic moat plays a vital role not weighted average of the costs of equity, debt, and pre-
In this stage, which can last five to 10 years, analysts
only in our qualitative assessment of a firm’s long-term ferred stock (and any other funding sources), using ex-
make full financial statement forecasts, including items
investment potential, but also in the actual calculation of pected future proportionate long-term, market-value
such as revenue, profit margins, tax rates, changes in
weights.
Morningstar Equity Research Star Rating Methodology

3. Uncertainty Around That Fair Value Estimate
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
ß
Our Uncertainty Rating is meant to take into account any- Morningstar Equity Research Star Rating Methodology
thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
purchase of the shares. In addition, the Uncertainty Rat- low:
ing provides guidance in portfolio construction based on QQQQQ We believe appreciation beyond a fair risk ad-
Morningstar Star Rating for Stocks
risk tolerance. justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme.
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Other Definitions

Our star ratings are guideposts to a broad audience and
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
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quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un- any specific recipient. This publication is intended to
lar emphasis on the firm’s balance sheet, investments, managed ESG Risks represented as a quantitative score. provide information to assist investors in making their
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale own investment decisions, not to provide investment ad-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing vice to any specific investor. Therefore, investments dis-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- cussed herein may not be suitable for all investors; in-
Corporate governance factors are only considered if they aged ESG Risk score is below 50. vestors must exercise their own independent judgment as
are likely to materially impact shareholder value, though to the suitability of such investments and recommenda-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are tions in the light of their own investment objectives, ex-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, perience, taxation status and financial position. Morning-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute, star encourages Report recipients to read all relevant is-
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- sue documents (e.g., prospectus) pertaining to the secur-
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- ity concerned, including without limitation, information
Standard rating is most common as most managers will tries covered. relevant to its investment objectives, risks, and costs be-
exhibit neither exceptionally strong nor poor capital alloc- fore making an investment decision and when deemed
ation. The ESG Risk Rating Assessment is a visual representa- necessary, to seek the advice of a financial, legal, tax,
tion of Sustainalytics ESG Risk Categories on a 1 to 5 and/or accounting professional. The information, data,
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low analyses and opinions presented herein are not warran-
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes, ted to be accurate, correct, complete or timely. Unless
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit otherwise provided in a separate agreement, neither
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ Morningstar, Inc. or the Equity Research Group repres-
sidered execution, compensation, related party transac- ents that the report contents meet all of the presentation
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and/or disclosure standards applicable in the jurisdiction
a company or security. Ratings involve unknown risks and the recipient is located.
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected Except as otherwise required by law or provided for in a
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to separate agreement, the analyst, Morningstar, Inc. and
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. the Equity Research Group and their officers, directors
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Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- within the report.
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tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per- ded for distribution to or use by, any person or entity who
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor’s is a citizen or resident of or located in any locality, state,
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an country or other jurisdiction where such distribution, pub-
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Standard rating is most common as most managers will original cost. A security’s current investment performance regulation or which would subject Morningstar, Inc. or its
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance affiliates to any registration or licensing requirements in
ation. noted within the report. Morningstar’s Uncertainty Rating such jurisdiction.
serves as a useful data point with respect to sensitivity
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair Where this report is made available in a language other
or to Dec. 9, 2020, was determined using a different pro- value price. than English and in the case of inconsistencies between
cess. Beyond investment strategy, financial leverage, and the English and translated versions of the report, the Eng-
dividend and share buyback policies, analysts also con- lish version will control and supersede any ambiguities
sidered execution, compensation, related party transac- General Disclosure associated with any part or section of a report that has
tions, and accounting practices in the rating. been issued in a foreign language. Neither the analyst,
Unless otherwise provided in a separate agreement, re-
cipients accessing this report may only use it in the coun- Morningstar, Inc., or the Equity Research Group guaran-
Sustainalytics ESG Risk Rating Assessment:The ESG tees the accuracy of the translations.
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a
stated otherwise, the original distributor of the report is
Morningstar company. This report may be distributed in certain localities, coun-
Morningstar Research Services LLC, a U.S.A. domiciled
financial institution. tries and/or jurisdictions (“Territories”) by independent
Sustainalytics’ ESG Risk Ratings measure the degree to third parties or independent intermediaries and/or distrib-
which company’s economic value at risk is driven by en- utors (“Distributors”). Such Distributors are not acting as
This Report is for informational purposes, should not be
vironment, social and governance (ESG) factors. agents or representatives of the analyst, Morningstar,
the sole piece of information used in making an invest-
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Sustainalytics analyzes over 1,300 data points to assess a Distributor distributes our report, the Distributor is solely
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company’s exposure to and management of ESG risks. In
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Morningstar Equity Analyst Report | Report as of 16 Dec 2023 05:15, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 24

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Price vs. Fair Value

Fair Value: 310.00

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Bulls Say Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

McDonald’s is well positioned to take advantage of evolving digital ordering habits.

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Fair Value Fair Value Last Close

Economic Moat Wide Wide Wide Narrow

chance to gain share in key markets.

Bears Say Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

seen during the chicken sandwich wars.

Economic Moat Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Turning to restaurant-level economics, we believe that the attractiveness of a brand to franchisees is

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

rely on the aggregators for demand generation.

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Capital Allocation Sean Dunlop, CFA, Equity Analyst, 7 Dec 2023

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Analyst Notes Archive

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

We believe that McDonald’s is uniquely well positioned to navigate an environment marked by

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Competitors Price vs. Fair Value

Yum Brands Inc YUM

Fair Value: 139.00

Chipotle Mexican Grill Inc CMG

Last Close: 2,271.47

1500 Over Valued

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Restaurant Brands International Inc QSR

Last Close: 98.60

150 Over Valued

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

Morningstar Historical Summary

Valuation as of 30 Nov 2023

Morningstar Analyst Historical/Forecast Summary as of 07 Dec 2023

McDonald's Corp MCD QQQQ 15 Dec 2023 22:16, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (42.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 23.1 100 0 programs, practices, and policies

Overall Unmanaged Risk 25.8 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

— —|— 0 55+ —|— 100 0 —|— 0 40+

Yum Brands Inc YUM 15 Dec 2023 22:16, UTC

Chipotle Mexican Grill Inc CMG 15 Dec 2023 22:16, UTC

Restaurant Brands International Inc QSR 15 Dec 2023 22:53, UTC

Research Methodology for Valuing Companies

Morningstar Equity Research Star Rating Methodology

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

4. Market Price Other Definitions

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies