Why McDonald's Going After The Wings Market Makes Sense

| About: McDonald's Corporation (MCD)

In a somewhat surprising move, McDonald's (NYSE:MCD) is following up the chicken McBites with its own iteration of chicken wings. The "Mighty Wings" are currently being rolled out across 500 Chicago area restaurants (one location we visited advertised them, but had yet to receive the raw goods). For our take on McDonald's valuation, please click here.

Although wing prices are high and have been hurting profit expansion at Buffalo Wild Wings (NASDAQ:BWLD), we like the move. Not only does it fulfill the need for the company to diversify its menu offerings, but we also think the new menu item could generate incremental revenue (assuming the wings are differentiated from other McDonald's chicken offerings). Buffalo Wild Wings, for example, is still experiencing rapid popularity increases and strong same-store sales growth.

Though we don't see the move as an attack on Buffalo Wild Wings or Wing Stop by any means, we do think a growing appetite for wings is something McDonald's and other fast-food restaurants could capitalize upon. Further, McDonald's has something in the neighborhood of 14,000 US locations while Buffalo Wild Wings is under 900-meaning there are plenty of places McDonald's will be serving that might not have much of an alternative. We think wings will be a good bet as long as cost pressures subside.

The company might have a hard time competing for wings dollars in competitive markets such as New York, Buffalo (obviously) and Chicago, which have plenty of bars that serve wings as a loss leader. However, smaller markets devoid of competition could be McDonald's sweet spot.

In our view, introducing the Mighty Wings is a step in the right direction toward reinvigorating the company's product offerings. Competitors such as Wendy's (NYSE:WEN) and Yum Brands (NYSE:YUM) have been innovating with new product, while McDonald's has primarily relied on heavy promotional activity. Still, we don't think it will materially move the needle in the near term, and we continue to believe shares of the fast food Goliath are fairly valued.

If shares were to pull back to the low end of our fair value range, we'd consider adding the company to the portfolio of our Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.