There's no question that McDonald's (MCD 0.18%) is a household name. While most people view the company from the perspective of a customer, it's also worthwhile to consider the investment implications.
In the last three years, shares of this top restaurant business have risen by 35% (as of Dec. 15). That gain does exceed the S&P 500, but it's not incredibly impressive. However, that doesn't mean this isn't a high-quality company.
As we look toward the next three years, let's try to figure out if McDonald's stock can be a huge winner for shareholders.
Management is hungry for growth
You would think a fast-food giant like McDonald's, with about 40,000 locations worldwide and trailing-12-month sales of nearly $25 billion, would be limited in its growth potential. But this doesn't appear to be the case at all.
The management team just set a lofty target. "By the end of 2027, we will expand our footprint to 50,000 McDonald's restaurants across the world," Manu Steijaert, chief customer officer, said during an investor update. That translates to a roughly 25% expansion of the current base.
It's not surprising that in its most mature market, the U.S., there will only be 900 new openings by 2027. A sizable number of stores, more than 3,500, will open in China.
Moreover, the innovation pipeline isn't dead. McDonald's new beverage-focused concept, CosMc's, is a perfect example of how the business can try to move the needle.
A continued focus on technology and digital transformation will underpin McDonald's growth ambitions. The company wants to have 250 million 90-day rewards members worldwide by 2027, with 30% of delivery orders completed through the mobile app. You'll see similar trends happening across the restaurant sector, as chains aim to increase accessibility and convenience for customers.
Economic moat protecting profits
It's usually a good idea for investors to take any executive team's growth targets with a grain of salt, but it's not hard to be optimistic about McDonald's. That's because this business has a powerful brand and scale advantages that protect its competitive position. And with a history that spans 80 years, this company has durability.
Another important factor that will propel McDonald's in the years ahead is management's goal to continue boosting profitability. "Beyond '24, we expect our progress in driving growth and creating leverage to continue with greater operating margin expansion," CFO Ian Borden said.
This isn't to say that McDonald's isn't already extremely profitable. The company's operating margin last quarter came in at a stellar 48%. To see this improve would be a welcome sight for shareholders.
By operating a capital-light franchise model, with just 5% of stores being company-owned, the business is able to generate high incremental margins on its revenue stream. This leads to the production of lots of free cash flow. McDonald's pays out a good chunk of this in the form of dividends, and income-seeking investors might find the current 2.3% yield compelling.
Is it time to invest in McDonald's stock?
An expanding store footprint, rising profitability, and a powerful global brand are all factors that could make anyone want to buy this stock. But we must also consider the valuation as we look toward the next three years.
As of this writing, shares are trading at a price-to-earnings multiple of 25.3. This might seem a bit expensive at first glance, but this ratio represents a discount to the trailing one-, three-, and five-year average valuations for the stock. This presents a favorable setup for investors.
I think the stock will perform well in the next three years should management make meaningful strides toward its goals.