There aren’t many things I’d be interested in buying at McDonalds (NYSE: MCD) – but I would be happy to pick up some of its shares for my portfolio. Here are three reasons I think the company could provide me with a rewarding investment over the years to come.
1. Large space for expansion
It can seem that the golden arches are ubiquitous. In fact I reckon that the opposite is true. Instead of thinking about how many branches the company has, I am focussed on how few there are relative to the company’s potential.
The McDonald’s formula of affordable, convenient food has been proven to work well even in very diverse markets. As the global population increases and more people move out of poverty, I expect the market size for a company like McDonald’s to grow a lot in coming years.
There is no shortage of competitors, both local and global. Indeed, strong competition pushing down profit margins is a risk to the McDonald’s share price. But I like the fact that with decades of experience under its belt, McDonald’s has a proven formula and deep expertise. That should help it take advantage of growing market demand.
2. Post-pandemic eating habits
I’ve never fully understood the economics of drive-through or delivery for McDonald’s, as intuitively they feel like they distract from the simplicity of its store model.
However, given how much the company has been experimenting in that side of the business over recent years, it apparently reckons that such approaches can be a good way to build its business. The pandemic has changed some customer habits permanently. I think there will be a larger preference for contactless purchase, delivery, and the ability to buy food outdoors rather than going into a confined space to purchase it. McDonald’s growth in that area in recent years has therefore positioned it well to take advantage of this shift in customer demands. I expect that to translate into growing revenues.
3. McDonald’s shares are a broad economic proxy
I also like the fact that McDonald’s existing scale, especially in developed markets like North America, makes it a broad proxy for global economic health.
As we saw last year, some hospitality groups are highly sensitive to unexpected downturns in customer demand. That is also a risk at McDonald’s — but I think less so. The company’s pricing means that most customers don’t see it as a discretionary luxury. Even when a toughening economy leads to people tightening their belts, many consumers continue to buy McDonald’s meals habitually, whatever their economic means. With its fairly consistent customer demand and broad reach, I like the fact that McDonald’s isn’t overly reliant on a single market, or overly sensitive to economic circumstances like some competitors.
Risks with McDonald’s shares
However, I am concerned that the company will struggle to stay relevant as customers focus more on the health impact of what they eat. That could hurt revenues and profits. I also reckon the company’s debt is a risk. Servicing it reduces money available to invest in the business or pay dividends. McDonald’s recently reported net debt of over $30bn.
Still, I would consider buying the shares for my portfolio. To me as a private investor, they’re the tastiest looking thing at McDonald’s.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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