As we all know, restaurants have very low profit margins. but McDonald's (NYSE: MCD)Surprisingly, the world's largest restaurant chain is one of the most profitable businesses. In fact, its profit margin is higher than prestigious businesses Tesla (NASDAQ: TSLA),,,,, apple (NASDAQ: AAPL)and Netflix (NASDAQ: NFLX).
I should clarify that profits can be measured from multiple perspectives. However, one of the best ways to measure profit is operating margins. This metric does not include things that are not related to the operation of the regular business (such as taxes, these taxes, which can swing wildly year by year - only focusing on the profits generated by the business.
On February 10, McDonald's reported its final financial results for 2024. The company has an operating margin of 45% over the year. That's the best in the world. As shown in the figure below, it is far better than the operating profits of companies such as Tesla, Apple and Netflix.
Assuming the core business is burgers and fries, McDonald's seems to make $45 operating profit for every $100 of sales. This indicates that its food is overpriced. But if you think selling food is a core business at McDonald's, you're wrong.
McDonald's has better operating margins than or better than the most profitable tech companies, because it is not in the food business itself. As I'm going to explain, this is a very interesting thing for investors.
At the time of writing, I am still waiting for McDonald's to submit its annual report, which contains more detailed financial reports than are usually reported to investors. So, allow me to mention the 2023 numbers for illustrative purposes. In 2023, McDonald's' total revenue is US$25.5 billion. Of these, it generated $15.4 billion (more than 60% of its total revenue) from franchised restaurants (operated by independent third parties).
Most of McDonald's franchise revenue comes from a particularly surprising source. It turns out that the company owns a lot of real estate and rents it to a franchise. It generated $9.8 billion in rental income in 2023.
McDonald's owns more than $27 billion in real estate when it looks at the land it owns and land on it owns at the end of 2023. This makes McDonald's the largest real estate portfolio for any restaurant company in the world. This dynamic could explain why the operating margins are so high compared to other restaurant chains.
In other words, McDonald's mainly provides third-party franchisees with the opportunity to run a restaurant business. The company provides franchisees with brands, systems and even buildings. Franchisees sell classic burgers and fries, which is a lower profitable business. But the parent company received royalties and rental income, which is so high that even the software company is jealous.
McDonald's expects its operating profit margin to further increase in 2025. Given the huge business, even modest improvements may still lead to a significant increase in operating profits.
Another interesting thing to consider is that McDonald's has about 43,000 restaurant locations today, but it is expected to exceed 50,000 in 2027. This has grown 16% in just three years, which makes great sense for businesses of this size. And, since most of the growth will come from franchisees, its high profit revenue stream is expected to be considerable.
Given the size and high profits of this business, I think McDonald's stock is one of the safest investments someone can make - in other words, I believe the chances of losing money are low in the long run. Given the size of McDonald's, I would say it doesn't necessarily have the highest upward potential. But this is still worth mentioning, and it is worth seeing if the price is lowered to a particularly attractive valuation.
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Jon Quast has no position in any of the stocks mentioned. Motley Fool has a place and recommends Apple, Netflix and Tesla. Motley Fool has a disclosure policy.
Surprise: McDonald's margins are higher than Tesla, Apple or Netflix originally published by Motley Fool