Food Prices Could Hurt McDonald's

Rising agricultural prices could hurt McDonald's profit margins.
By Trefis ,

NEW YORK (

Trefis ) --

McDonald's

(MCD) - Get Report

which competes with

Starbucks

(SBUX) - Get Report

,

Chipotle

(CMG) - Get Report

,

Yum! Brands

(YUM) - Get Report

,

Burger King

(BKC)

and

Wendy's

(WEN) - Get Report

, reported strong November sales earlier this month.

We expect this trend to continue as the U.S. economy recovers and McDonald's increases its presence in Asian Markets. The company is benefiting from its global expansion initiatives,

which we discussed in a recent article

.

We

have a Trefis price estimate of $73.58 for McDonalds

, which is around 4% below the current market price.

In the U.S., comparable sales increased 4.9% for November through customer-focused initiatives that provide variety and value. This included the company's nationwide promotion of McCafe Frappes and Smoothies and the everyday affordability of the Dollar Menu. In addition, the company has rolled out several promotions such as its Monopoly game and the reintroduction the McRib for the month of November.

Comparable sales in Asia/Pacific, Middle East and Africa increased 2.4% for November, primarily driven by positive results in China and most other markets. They also benefited from McDonald's marketing of the factors that differentiate it from its customers, such as delivery and drive-through. McDonald's plans to open 150 to 175 stores in China in addition to the current 1,100 stores and 60,000 workers already in China. (See

McDonald's Yuan bond sale to drive growth in China

.)

However, increasing prices of many agricultural products like beef and diary could escalate costs for McDonalds and affect margins on some of its budget offerings, such as its famed value meal. With the fast food industry being highly competitive, leading to easy availability of substitutes, McDonalds would be under pressure to increase prices.

Currently we forecast the Company Operated Restaurants EBITDA Margin to be around 24% during our forecast period. However, if increasing input costs eat into margins, there can be a downside to our forecasts. If the Company Operated Restaurants EBITDA Margin decreases to around 20% during our forecast period, it would mean around 5% downside to our current price estimate for McDonald's stock price.

See our full estimates for McDonald's here

.

Like our charts? Embed them in your own posts using the

Trefis Wordpress Plugin

.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Loading ...