McDonald's (MCD)

McDonald's is the world's largest restaurant franchise (~95% franchised), and at its core a royalty + real estate business: it collects rent (US$10.4bn, the larger piece) plus royalties (US$6.0bn) on systemwide sales (US$139.4bn), owning the land and buildings — a very high-margin annuity (46.1% operating) largely independent of franchisee profitability. The moat is brand plus cost scale plus real estate. A dividend king (50 years), ROIC 20.3%. Growth (~7% in earnings) comes from comparable sales (~3%) plus capital-light unit growth (toward 50,000 by 2027) plus buybacks. The headwinds to watch are the low-income consumer and the possible GLP-1 effect.

McDonald's is valued on P/E over earnings — book equity is negative (an artifact of decades of buybacks: US$79.3bn in treasury stock), so book value doesn't apply; it is a deliberately leveraged company (debt of US$40.0bn, gross, funding buybacks against predictable, cycle-resistant cash flows). Earnings are levered → the P/E delivers equity directly, and the debt lives in the DCF and in financial health, not subtracted again. On FY2025 non-GAAP earnings of US$12.20/share, at ~$270 the P/E is ~22× — below its historical ~25×, near its 52-week low.

The base case projects earnings compounding ~7%/year (comparable sales ~3% plus unit growth ~2.5% plus modest buybacks, with the margin stable at ~46% operating) toward ~$17/share in five years, at an exit multiple of 20.5×. That multiple is the midpoint of the quality restaurant franchise band (18-24×) — a premium over a consumer staple for the rent-and-royalty annuity and the brand, but below its ~25× historical level on the low-income consumer and GLP-1 headwinds. That gives ~$353/share → a total return of +8%/year, of which the dividend (2.8%, a 50-year king) is a meaningful part.

It trades close to intrinsic value, far from the required margin of safety. At ~$270 (near its 52-week low) McDonald's trades at ~22× earnings — below its historical ~25×, a discount generated by low-income consumer weakness and fear over GLP-1s. The verdict is Fairly valued: a very high-quality defensive compounder (dividend king, ROIC 20%, the real estate annuity) at a below-norm multiple, with a dividend (2.8%) carrying part of the return. The adverse scenario (consumer weakness persists, GLP-1s bite into demand, and the multiple compresses to 17×) brings the value below the price; the favorable one (the value strategy wins back traffic, unit growth continues, and the multiple recovers toward the norm) is a clear upside. The asymmetry is favorable to balanced: the rent and royalty annuity gives a resilience backstop a pure restaurant operator doesn't have, and the discount to its historical norm leaves room if the headwinds fade.

Three things. The low-income consumer (the short-term disconfirmer) — U.S. comparable sales (from +0.2% in FY2024 to +2.1% in FY2025) and the success of the value offer in winning back traffic are the key metric; the 10-K itself warns about franchisee financial health and willingness to invest as a condition for future growth. GLP-1s (the long-term structural risk) — the filing mentions them as a factor that could alter consumer behavior, without yet quantifying the impact or describing a concrete menu response; the effect on fast-food demand is the decade's big unknown. And unit growth — the push toward 50,000 restaurants by 2027 (capital-light) plus the loyalty program (250 million target users) are the structural growth drivers. If consumer weakness is cyclical and fades, McDonald's at this price is a quality defensive; if GLP-1s end up structurally disrupting fast food, the long-term thesis weakens.