New MCD Strategy Leaves Investors Hungry for More, Stock Falls to 4-Year Low

SPEAKER_1 (0:00)

We're back on Morning Trade Live. Let's focus on some fast food stocks this morning. McDonald's trading higher after a pretty tough session yesterday following its investor day, the first in nearly three years. It looks like even with some of the strategic plans and goals that it's set out as far as financial targets, investors weren't too impressed with what they had to say, particularly on the macro outlook and the amount of money that they're going to have to spend when it comes to franchisees.

Young brands, Wendy's, restaurant brands, all lower on the session today. In fact, McDonald's is the outperformer. So making up for some of the lost ground we saw yesterday, as we mentioned, it was its investor day. We saw the reaction in the shares. Now we've got some more reaction today. So that's the focus of The Morning Trade. For a closer look and some of the details is Marley Kayden. Good morning, Marley. Just run through what we've heard now, because it looks like we're trying to make up for some of that lost ground yesterday.

SPEAKER_2 (0:54)

Yeah, and they lost about 6%, Sam, yesterday after unveiling some more details around this McDonald's next plan that they had originally disclosed back in June, but it was very detail light when they first announced this new plan. Now that investors have the details, as you mentioned, they didn't seem to like them. We are seeing a bit of a move higher today, not even a percent, though certainly doesn't make up what we lost after they announced the details. So let's walk through why they're changing strategy here and what the new strategy is. They were going to upgrade restaurants. They want to try to find different ways to win over GLP-1 users. That's a big focus here.

They have had a series of sluggish sales, consumers hit by elevated inflation. We've seen people visiting restaurants less, pretty much across the board, but they want to find a way to win over diners. So now what they're going to do is they have this series of remodels. That's a big part of this strategy. McDonald's does mandate them every decade for franchisees, but they have these new designs. They're bringing back play places. They're updating the McDonald's that already have them.

They're preparing open kitchen layouts. They want the McCafe drinks to feel more like a barista, more like a Starbucks experience. We can actually see your drink being prepared as they push more into the beverage space. They view that as a big driver. They'll also improve their equipment, their tech and their operations. They have a new artificial intelligence powered operating system that they say can take orders in Spanish and English from customers. It can do inventory schedule shifts and they say it'll save about 50 labor hours per week in terms of its efficiency.

So they're adding that. They're also going to require some pretty steep financial investment. I think this is where some of the numbers get a little bit sticky. Usually the franchisees are responsible for any upgrades to their McDonald's franchises. So they want everyone to do these upgrades. Upgrades, generally, these remodels cost $400,000 to $450,000. But I was looking at the average metric for an average annual US franchisees cash flow. It's currently about $500,000. So the potential for pushback from franchisees is very high here. They're also projecting about $5 billion of support that's going to have to happen for these franchisees as they pivot this strategy. About $1.5 to $2 billion in capital spending from $27 to $20.30, then an additional $3 billion every year on typical CapEx. In 2025, they spent about $3.4 billion in CapEx. So the other interesting thing is they're planning a media network. I'm not really sure where that fits in the equation. But they're going to advertise other businesses on their digital drive-throughs.

They say that it could become a billion-dollar business, and they've started testing it. Not mentioned in any of the analyst coverage, though, that I found. TD Cowan lowered its price target on McDonald's from $2.70 to $2.82. So still about a $30 upside from where we are. Has a hold rating. Says the stock is trading at 17 times forward earnings. That's the lowest since 2016 ex-COVID. And it suggests that not much needs to go right to drive alpha, though it is also balanced with an unclear timeline for recovery. They also called their EPS growth for 27-30 opaque. Evercore ISI also lowered their target to $300 down from $3.20. Keeps an outperform rating, though, and still some significant upside there. They said they're trimming their 27-30 EPS by about 3%, citing the refranchising, that rent relief, and slightly lower same-store sales estimates. And JP Morgan was the last note that I saw today, also maintaining an overweight rating, but dropping their price target down to $2.60. So that's only about $20 from where we are right now.