The Long and Short
An appetite for McDonald’s as Russia-Ukraine widens spreads
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Of all credits in the investment grade universe, McDonald’s (Baa1/BBB+) has among the most revenue exposure to the Russia-Ukraine conflict. The two countries combined contributed approximately 9% of company revenues in fiscal 2021. The intermediate and back end of MCD’s curve has widened more than the consumer discretionary curve over the past month, but any impact from sanctions imposed is not likely to materially affect credit metrics or margins. If all EBITDA from both countries disappeared completely for a full year, leverage would increase less than one tick. Any widening associated with the conflict makes MCD a better relative value.
Exhibit 1. MCD Curve vs. Consumer Discretionary Curve (Now vs. 1 Month Ago)
Source: Bloomberg TRACE; APS
MCD has seen a strong rebound since the pandemic started, having posted systemwide sales growth of 21% in 2021. That growth was largely fueled by the U.S. market, which posted comparable sales growth of 13.8% for the year, marking the highest U.S. annual comparable sales percentage ever reported.
Exhibit 2. MCD Systemwide Restaurants (FYE 2021)
Source: Company Supplemental Reports; APS
Russia/Ukraine a Small Percentage of Overall System
MCD ended the most recent fiscal year with a systemwide restaurant count of 40,031 as seen in Exhibit 2. The combined Russia/Ukraine restaurant count represents 2.4% of MCD’s total restaurants. According to MCD, 84% of Russian restaurants and all of the Ukraine restaurants are company operated. That said, on a combined basis Russia and Ukraine accounted for 9% of revenues in 2021, but only 2% of systemwide sales. On an operating income basis, the combined countries only accounted for less than 3% of operating income, as franchised restaurants carry higher operating margins.
Given the sanctions being imposed, if one were to assume a full loss of revenues and operating income from the combined countries, we note that would have less of an impact than the revenue and operating income loss caused by the pandemic in 2020 for MCD. Furthermore, a loss of 3% of EBITDA would only increase MCD’s non lease-adjusted leverage metric from 2.98x to 3.07x. We think there is little to no risk to ratings from its exposure to both countries, and believe the strong rebound being witnessed in the United States could help to offset any lost revenues and income.
Strong Free Cash Flow Further Underscores Positive View
Not only did MCD witness its strongest annual comparable sales growth this year, but free cash flow also hit an all-time high. MCD posted free cash flow of $7.1 billion for fiscal 2021, up nearly 54% from the year-ago period and 25% from 2019. We note that FCF/sales for the year was a strong 30.6%, up 650 bp year-over-year and 380 bp from 2019. Management noted that franchisee cash flows hit all-time highs in most of their top markets, including the U.S., U.K., Canada, Germany and Japan. In the U.S., management noted that cash flow per store increased $125,000, which puts MCD at $500,000 in cash flow per unit. This helps to put franchisees in a stronger position to weather inflationary pressure which was up 4% in 2021. Capital allocation priorities remain unchanged with MCD looking to invest in new units and update existing restaurants to fuel growth, with the dividend and share repurchases remaining second and third priorities, respectively.
1 (646) 776-7753
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.