Monday, 18 May 2015

Is McDonald's Losing Its Economic Castle?


  • Is there really much to like about McDonald's anymore?
  • Let's walk through its challenges, and whether it means the company's Economic Castle is deteriorating.
  • We give our high-level thoughts on the turnaround plan and disclose our fair value estimate of shares.
  • We also have some interesting ideas at the end of the article that many may be overlooking.
What in the world is an Economic Castle?

Berkshire Hathaway's Warren Buffett has popularized the concept of an "economic moat," perhaps best described in common language as sustainable competitive advantages. But an Economic Castle? Are we just confused?

In short, no.

Whereas economic moat analysis focuses on the duration of a company's economic profit stream, as measured by return on invested capital less the costs of which to attain that capital, economic castle analysis focuses on the magnitude of economic profit creation over the realizable near term.

Unlike the substantial duration risk inherent to predicting economic profits 20, 30 or more years into the future, the economic castle framework posits that the strongest performing companies during certain phases of the economic cycle will be those that generate the most economic value over the foreseeable future.

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