We’ve covered more than 100 companies by now, which feels surreal. We’ve covered tech, e-commerce, software, retail, airlines, car manufacturers, banks, data centers, and so much more. But we never covered a restaurant business before.

To be fair, most of them aren't great businesses. But the same goes for many other industries we covered. And McDonald’s is a different animal. It’s just as much a real estate company as it is a fast food chain.

It's also one of the best-known brands in the world, and it recently hit multi-year lows. So today we want to figure out whether now is the time to buy McDonald’s.

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— Daniel

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McDonald’s was founded by two brothers in San Bernardino, California, about 85 years ago. Their names were Richard and Maurice McDonald – so that immediately answers the question about the name.

For the first eight years, it was a normal drive-in with carhops and a quite extensive menu. But in 1948, they revolutionized how fast food would work for the next century. They closed for a few months, cut the menu down to just nine items, got rid of the carhops, and rebuilt the kitchen as an assembly line. They called it the Speedee Service System. This was a much more efficient way to run the operation and let them offer much more competitive prices. As a little fun fact: a hamburger cost 15 cents back then. Good times… Although, inflation-adjusted, we are not that far off.

The model worked so well that they sold a few franchises in California and Arizona. But the brothers weren't interested in making it a much bigger thing. There was a guy who was, though.

Ray Kroc sold milkshake machines. When one hamburger shop in San Bernardino ordered eight of them, he flew out from Chicago to see how one place could need that many machines. He saw the lines in front of the store and a kitchen that ran more like a factory than a restaurant, and realized this could be much bigger than a handful of stores.

So he decided to make a deal. Kroc got the right to franchise McDonald's nationally; franchisees would pay 1.9% of sales, and half a percent of that went to the brothers. In 1955, he opened his first restaurant in Des Plaines, Illinois.

But he quickly figured out that the deal was terrible. He sold 18 franchises in his first year and could barely cover his expenses. He was paying for field consultants, training, and site selection, and getting only 1.4% of sales for it. But instead of giving up, he figured out a way to make it work.

The man who helped solve that problem was Harry Sonneborn, who had been the finance VP at Tastee-Freez and joined Kroc in 1956 as basically the CFO. Sonneborn's idea was not to make money on the hamburgers, but on the land under the stores. McDonald's would find a site, buy it or take a long-term lease, and then sublease it to the franchisee at a markup of 20 to 40%. Rent was then set as the greater of a fixed minimum and a percentage of sales.

By now, this is an industry standard. I recently had dinner with an Inner Circle member who is opening a Restaurant in London. He told me how difficult it is to find a location at the most sought-after addresses because they tend to go with known franchises, since they know exactly how much money they will generate and can better set rates (the percentage of sales).

The biggest advantage of this real estate approach for McDonald’s is that it gave the company a second revenue stream that was far more reliable than the royalty. It also gave the company more control. Because a franchisee who runs a bad store isn't just a licensee anymore – he's also a tenant, and tenants can be evicted.

And the one I found most interesting: it made McDonald's bankable. Banks didn’t want to lend to restaurants given their high failure rate. But Sonneborn could now argue that they weren’t in the restaurant business, but in the real estate business. It worked, and McDonald’s could use loans to grow the business.

The insurers made an incredible deal, too, by the way. They lent $1.5 million at 7% and received 22.5% of the equity. That stake would be worth tens of billions today.

Kroc eventually bought out the brothers for $2.7 million. There was one problem, though. The brothers had promised their original San Bernardino shop to their employees. Since they couldn't call it McDonald's anymore, they named it "The Big M." But Kroc didn’t want that type of competition. So he opened a McDonald's nearby and bankrupted The Big M.

As he later put it: "I needed the McDonald name and those golden arches. What are you going to do with a name like Kroc?" Not the type of guy you'd want to do business with, perhaps, but I assume you needed someone that relentless to turn a hamburger stand into a global empire.

Fast forward to today. McDonald's operates only about 5% of its 46,000 restaurants itself. The other 95% are run by franchisees. But McDonald's owns the land under more than half of all restaurants and the building in nearly 80% of cases. When it doesn't own the land, it leases it and subleases it at a markup. Either way, the franchisee almost always has McDonald's as its landlord.

That's why the margin profile looks nothing like a restaurant. McDonald's has an operating margin of 46%. Chipotle, which is a well-managed operator, is at about 15%. The roughly 2,000 restaurants McDonald's runs itself generate close to $10 billion in revenue at a 15% margin. The rent and royalties generate $16.5 billion at an 84% margin. When you add it up, more than 90% of profits come from being the franchisor and the landlord.

This also creates a dynamic you rarely see with restaurants, or any retail, for that matter. Normally, a restaurant chain's margin goes up with scale. At McDonald's, the margin goes up when it sells a restaurant to a franchisee. Of course, revenue drops because you lose the $4 million in sales that restaurant generates, but you replace it with rent and royalties that cost almost nothing. That's part of how management plans to get the operating margin into the low-to-mid 50s by 2030, which they announced at the investor day in September.

I mentioned that Buffett was once invested in McDonald’s. But he is not the only superinvestor. Bill Ackman built a 5% stake in the company roughly 20 years ago. His thesis was that about 90% of McDonald's economic earnings came from land and franchising, and that the real estate alone was worth a large share of the market cap.

The real estate sits on the balance sheet at about $28 billion. But that's what McDonald's once paid for it, and it bought much of it in the 1960s and 70s. There are estimates that go as far as saying the real estate today could be worth as much as $120 billion.

McDonald's market cap is about $200 billion after the jump on Q3 earnings this week (it was closer to $160 billion when we recorded the episode a week earlier). So if those estimates are anywhere close, the operating business trades for something like $80 billion, and it produces close to $7,5 billion in cash flow a year. That’s roughly 11 times cash flow for the biggest restaurant in the world – and it was closer to 6 times just a few weeks ago.

Ackman’s idea back in 2005 was for McDonald’s to borrow money against its real estate and buy back shares. Back then, McDonald’s didn’t agree with that plan, and Ackman ended up selling. Ironically, McDonald’s did pretty much exactly that since then.

The general setup is the same as in the early days. Rent is a percentage of sales with a fixed minimum. And that percentage depends on how much McDonald's invested in the site. An older, fully depreciated store pays about 8.5% of sales. A newly built one is closer to 10%, and if you operate a flagship store at the best addresses, you can pay north of 15%. On top of that comes a 4% royalty and another 4% into the national advertising fund.

For the average U.S. restaurant, which does about $4 million a year, that's roughly $400,000 in rent, $160,000 in royalties, and $160,000 into the marketing pot – before food, labor, or anything else. Typically, these franchise agreements run 20 years.

This is the setup for all the developed McDonald’s markets – primarily North America, Australia, and the big European markets like Germany, France, and the UK.

The U.S. is almost 40% of systemwide sales, with 13,700 restaurants, 95% of them franchised, and McDonald's owning most of the real estate. International Operated Markets – the big wealthy countries where McDonald's runs the market itself and franchises to local operators, such as Germany, the UK, France, Canada, Australia, and so on – are 35%.

And International Developmental Licensed Markets is everything else: China, Japan, Latin America, the Middle East, India. There, a master franchisee owns the whole country, builds its own restaurants with its own money, and pays McDonald's a royalty. That's 26% of sales, but almost half of all McDonald’s restaurants.

You can see the difference in profitability between these markets and their operating models. In the U.S., where McDonald's owns the land, 39% of system sales turn into 40% of revenue. Europe is highly profitable, too.

In licensed markets, though, 26% of system sales turn into just 9% of revenue because McDonald's collects only a small royalty there. If you want to see the franchisee side of these economics in public filings, I recommend looking at Arcos Dorados (ARCO), the master franchisee for all of Latin America, which just signed new 20-year agreements with McDonald's.

China is a special case. McDonald's sold 80% of the business to CITIC and Carlyle in 2017, then bought 28% back a few years ago, so it now owns close to half again. It's the fastest-growing market by restaurant count, with about a thousand openings a year, but comps have been negative recently. Not surprising given the weak Chinese consumer we discussed in our Hermès and LVMH coverage – although you would be right to point out that the target customers are very different...

McDonald’s is one of the most stable companies in the market. At its low in early October, the stock was down 32% from its all-time high. That might not sound too dramatic, but what is weekly volatility for Neoclouds is a massive move for McDonald’s. It was the biggest drawdown since COVID, and even bigger than anything the stock saw in 2008, when it held up far better than the market. Only the dot-com aftermath, when McDonald’s lost almost three-quarters of its value, and the 1970s were worse.

And while traffic slowed in 2026, I don’t think that’s the primary reason for the drawdown. McDonald’s is a pretty good proxy for the lower-income consumer, and that consumer is struggling. But there are always good and bad times. And if I can buy a business I know will recover, I'm happy to buy it when it's not all sunshine and rainbows.

What I'm more interested in is whether McDonald's has long-term problems. The most obvious ones are GLP-1 drugs. About 11 to 12% of American adults now take a GLP-1 drug like Ozempic or Wegovy, which has nearly quadrupled in two years. These drugs mimic a natural gut hormone that slows digestion and increases feelings of fullness. I spoke with a doctor in our Mastermind community, and he explained how they work in more detail in our podcast episode.

Market research shows households with a GLP-1 user spend about 8% less at fast food chains and coffee shops within six months of starting. Given it's still mostly a U.S. phenomenon, the math says the impact should be about 1% of McDonald's sales today. And McDonald's points out that about 85% of households with a GLP-1 user still visit. They just prefer McNuggets, Filet-O-Fish, and Happy Meals – so basically what I ordered when I was 12, haha – because of the smaller portions and less fatty food. McDonald's is now also adding "portion-flexible" and "protein-led" options.

McDonald’s sells it as an opportunity, but what are they supposed to say? I don't buy the idea that this is somehow an opportunity for McDonald's. The question is whether it's a 1% or a 10% sales impact. I thought it would be closer to 1%, but the more I learned about these drugs, the less sure I am.

Users I talked to describe not just less appetite but a real shift in what they crave – less sugar, more protein, and many said fast food now generally messes up their gut. And the next generation of peptides is apparently about twice as effective as the first. They are designed for ongoing use, too. To be fair, most patients today still stop within a year, but the drugs are getting better, cheaper, and easier to stay on, so I wouldn’t count on that.

I used to be highly skeptical of GLP-1s, but I have to admit, the research for McDonald’s “sold me” on these drugs. From a utilitarian perspective, they clearly produce more good than bad, and if they force McDonald's to put healthier options on the menu, everyone wins. Everyone except perhaps the shareholders.

Another risk factor is competition. This is a bit nuanced since there is obviously not one player who could rival McDonald’s in size and global brand awareness. However, as Buffett pointed out as one of the reasons he sold, the vast majority of people want variety in their food. Personally, just like Buffett, I’m perfectly fine eating the exact same thing every day. I actually enjoy it. But I know that makes me an outlier.

Most people want to try new things. That’s different, by the way, with drinks. People who love Coca-Cola will choose it at a McDonald’s, the next day at Chick-fil-A, and so on.

To add to that, fast food is a business of availability. While there are rivalries between fast food chains and fans of one wouldn’t go to a direct competitor, overall, people go to the shop that’s convenient in the moment. McDonald’s often wins because it appears to be everywhere. But if you can’t find a McDonald’s, you just go to KFC.

All that to say, I expect competition to increase, not decrease. You might argue that that has always been the case and McDonald’s still flourished. And you would be right. And yet, the same argument worked for Nike before they made one strategic mistake, and all the competition suddenly had an opening that they used. McDonald’s hasn’t yet made any such mistake. But sometimes it’s an external factor. And GLP-1 could be it.

One of the most successful competitors in recent years has been Chick-fil-A – Shawn's absolute favorite, and the only fast food he's willing to eat. They did about $24 billion in U.S. sales last year from only 3,300 restaurants, up from $12 billion in 2019. The average restaurant does $8-9 million – more than twice a McDonald's. And I can now proudly say I've tried it, after visiting Shawn in Virginia. One bite, but still.

One structural difference is that Chick-fil-A franchisees can only own one store. At McDonald's, you can own as many as you want. If you own one, you make it the best restaurant possible. If you own ten, you care about running all of them as efficiently as possible. That's a big part of why the service is so different.

Chick-fil-A is so successful that McDonald's now wants to compete more directly and gain 1.5 percentage points of share in chicken by 2030. McDonald's already has about 20% of the $130 billion chicken market, roughly on par with its beef business, but beef is a smaller market, so McDonald's is much more dominant there.

It's also expanding into beverages – the new McCafé lineup launched with crafted sodas, refreshers, and Red Bull energy drinks launched nationally in August – with the goal of gaining, coincidentally, 1.5 points of share there too. I'm sure there's a precise model behind that number, haha.

As I said a minute ago, McDonald's feels a bit like Nike to me. More scale, more global, and better known than anyone else. But I don't get the “family-and-kids” feeling anymore that I remember from 15 years ago. It feels like it's winning on scale, accessibility, and inertia. Then again, Kyle told me in London his kids still love going, so maybe that's just me.

Part of that feeling also comes from the impression that McDonald’s is not as cheap as it used to be. It’s almost as if they didn’t try everything to avoid passing costs on. But that’s not really the case. I compared their cost increases to their price increases over those years, and they didn't ruthlessly take margin on the back of inflation. It was roughly in line.

Also, franchisees set prices, not headquarters, and they care about being profitable at the end of the month, not about Nick Sleep's scale economies shared model.

Speaking about franchisees, the average U.S. McDonald's does about $4 million in sales, and the franchisee keeps around $500,000 in cash flow after food, labor, rent, royalties, and everything else. That's up almost 50% since 2019, but about 10% below the post-pandemic peak, and it's only human to anchor on the peak.

That’s why franchisees are not happy right now. The National Owners Association, an independent franchisee group, surveyed about a hundred of the roughly 2,000 U.S. owner-operators this summer. 95% said restaurant profitability declined in the first quarter, 97% said the company's plan isn't improving their cash flow, and about 80% said their cash flow is "not sufficient to support required reinvestment obligations."

That last one particularly matters, because McDonald's usually doesn't pay for the restaurants. The kitchen, the remodel, the technology – that's the franchisee's money. So McDonald's essentially grows on someone else's capital, which is an incredible business model as long as that someone can afford it.

That's where the NEXT strategy comes in. Besides chicken, beverages, and the app, it's about the restaurants themselves. McDonald’s wants remodeled kitchens, new technology, and new formats for delivery.

The average U.S. restaurant needs about $800,000 of investment, and about 70% of them are supposed to go through it in the next four years. Very roughly, $7 to $8 billion of franchisee money. But since the franchisees made it clear that they can't afford that, McDonald's is going to help. They promised $8.5 billion through 2036, with about $5 billion by 2030. $1.5 to $2 billion is direct capital. The rest is rent relief.

That news wasn’t well received by the market since rent relief isn’t capex, but revenue coming straight off the 84%-margin rent-and-royalty line, so the hit to 2027-to-2030 earnings could be as much as 3%. But I think the market reaction was short-sighted. Roughly every ten to fifteen years – 2003, 2015, now 2026 – McDonald's admits the restaurants have gotten stale and forces a reinvestment cycle. Ultimately, the rent doesn't come in when the franchisees leave because the business deteriorates.

Chris Kempczinski has been CEO since late 2019 and came up through P&G, PepsiCo, and Kraft before joining McDonald's on the strategy side in 2015. He’s a typical career CEO, not the founder type – but that doesn’t have to be a negative. Under his "Accelerating the Arches" strategy, McDonald's added about $40 billion of system sales and over $3 billion of operating income, and comps beat the industry by about four points a year. That's a very good five years, viral burger-eating clip aside.

He was paid around $20.5 million last year, $15 to $16 million of it in long-term equity. Half of that is performance shares tied to EPS growth (the target is 6% a year), ROIC, and total shareholder return versus the S&P 500; the other half is stock options. It's a decent program. The EPS factor makes it very likely buybacks continue, and I like that he's incentivized on ROIC now that McDonald's is about to spend $8.5 billion on remodels.

On capital allocation, McDonald's is a dividend king. In September, it raised the dividend for the 50th consecutive year – every year since 1976. It's $7.72 a year now, which was a 3.3% yield when we recorded – the highest the stock had offered since early 2020 – and is about 2.8% after this week’s jump. They also bought back $2.1 billion of stock last year. Together, dividends and buybacks return essentially 100% of free cash flow to shareholders.

A quick update before the numbers: McDonald’s reported Q3 on Wednesday, after we recorded the episode. U.S. comps were slightly negative (-0.2%) because fewer people came in, but higher checks almost offset that; EPS still grew 10%, and management said traffic improved as the quarter went on. The market liked that more positive outlook, and the stock continued its monthly rally.

That changes the numbers a bit compared to what you heard on the show. McDonald's now trades about 18% below its 52-week high at a P/E of 23. At the October low, it was 30% below the high at 18 times earnings, which sounded pretty low for a business with 46% margins and one of the strongest brands in the world. Today, it’s only slightly below the historical average of the last decade, which has been 24 to 25 times.

One interesting observation about McDonald's is that it had been trading like an inverted 10-year Treasury. Between early March and early October, the 10-year yield was up 32%, and McDonald's stock was down an identical 32%. Part of that is the real estate, which drops in value when rates go up. Part of it is that McDonald's competes with bonds in some portfolios, and a 10-year paying close to 5% with no company risk looks attractive next to a 3% dividend yield. The $40 billion of debt, by the way, is almost entirely fixed-rate at about 4% on average, so that part isn't a problem.

When I built the model, I mostly ignored system sales. They matter for checking whether the franchisees are healthy, but McDonald's own revenue is only the $27 billion it gets from rent, royalties, and the self-managed stores. So rather than modeling system sales or geographic segments, I built it around the three revenue streams that actually hit McDonald’s P&L: franchised revenues at $16.5 billion and an 84% margin, company-operated restaurants at $9.7 billion and a 14.7% margin, and a small, fast-growing line of brand licensing and tech fees.

In my base case, revenue only grows about 1.6% a year. That seems very conservative, but remember the rent relief from the NEXT strategy comes off the top line, and McDonald's keeps selling company-operated restaurants to franchisees, which reduces revenue but raises the margin. Operating income therefore grows faster, in the mid-single digits. Add about 1% a year of buybacks, and EPS grows in the mid-single digits – which, funnily enough, is exactly the 6% target in Kempczinski's bonus plan.

Put a P/E of 20x on 2030 earnings, discount it back, and you land at a fair value of about $220. At 24x, close to the decade average, it would be $260. But with a 20% margin of safety, the buy price would be lower than today's price even then. From $280, and including the dividend, you’d expect roughly 6 to 9% a year from here, depending on which multiple you believe in. At the October lows, that was closer to 10%. Either way, it’s not outrageously cheap.

And there's a scenario where GLP-1 ends up closer to a 10% sales impact than 1%. If that happens, there’s a much stronger headwind than what I modeled here. All in all, I think McDonald’s can be a good buy for a dividend portfolio that wants limited volatility, but it’s not attractive enough for us to add it to the Intrinsic Value Portfolio today.

To listen to our episode on McDonald's, check out our podcast here.

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