The Canadian Investor - AI Is Creating Opportunities in Engineering Stocks & Why McDonald’s Is Spending Billions to Reignite Growth

Episode Date: October 12, 2026

In this episode of The Canadian Investor Podcast, Simon and Dan look at the sharp selloff in engineering firms like WSP Global, Stantec and AtkinsRéalis. Despite record backlogs, improving margins and solid earnings growth, valuations have collapsed as investors worry AI could disrupt the traditional billable-hour model. They discuss whether those fears are justified—or whether AI could actually become a tailwind by easing labour shortages and improving productivity.  They also dig into the challenges facing fast-food restaurants as inflation squeezes both consumers and franchisees. McDonald’s is seeing weak traffic and focusing heavily on value, loyalty programs and restaurant upgrades, while Restaurant Brands International is seeing stronger results at Burger King after years of reinvestment. The discussion looks at why cheap prices alone may no longer be enough—and why grocery stores may be becoming fast food’s biggest competitor.  Stocks discussed: WSP.TO, STN.TO, ATRL.TO, MCD, QSR.TO   Subscribe to our Our New Youtube Channel! Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Asset Allocation ETFs | BMO Global Asset Management This podcast Ad Read is intended for information purposes only. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment, tax, or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. Past performance is no guarantee of future results. The viewpoints expressed by the speaker represent their assessment of the markets at the time of recording . Those views are subject to change without notice at any time. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination. BMO ETFs are managed by BMO Asset Management Inc., an investment fund manager, a portfolio manager, and a separate legal entity from Bank of Montreal.BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used underlicence.See omnystudio.com/listener for privacy information.

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Visit BMOetfs.com to learn more and find the ETF that's right for your portfolio. For full disclaimers and more information, please check out the description in today's episode. The market's going to be 100% efficient at pricing in. whether or not they believe AI will disrupt WSP. Your advantage here is you have to figure out if the market is wrong. Because the market has been wrong numerous times in the past. AI right now at least is actually fueling the business, not really in terms of implementation, but just in terms of build out.

If you're willing to put a bit of time to cook your food, it's going to win nine times out of 10. Where you can get additional value, it's offering value to customer in terms of pricing, but also experience and making sure that you have an environment that's inviting. You have a menu that's easy to understand. You have a menu that's appealing for your customers. I think you're going to see AI be a tailwind, not a headwind.

Welcome to the Canadian Investor podcast. I'm back with Dan Kent here. We have a fun episode coming up. So if you're a new listener to the show, you'll know that on Monday is kind of a more regular concept episode. Sometimes we'll look at companies. Sometimes we'll do some lists. It's a bit kind of a mix bag of what we'll do on Monday.

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You're going to be talking about engineering firms. So if you're listening to a podcast for a while, you'll know that we do talk a decent amount about WSP Global. And this is one of the companies you'll be looking at. So these firms have been down, what, 40% plus. There's more than just WSP. So you'll go over that. And then I will look at the fast food restaurant industry that is definitely struggling right now, which may be a bit surprising because.

If you're like me, and I think you, Dan, as well, you're finding that food costs are more and more expensive and fast food typically is better value. But even McDonald's and Restaurant Brand International, which owns Tim Orton's, Popeye's, Burger King, and Firehouse Subs are finding the environment quite challenging. So make sure you stay, you keep listening to the podcast for the second part of it. You'll start with Dan here and the engineering firms. Yeah, so getting a lot of questions on these now. and it's really not that surprising. They're down, as you had mentioned, I think WSP is around 45% down from highs and Stantec is around 40%. Atkins Realis is down around 20, I think, but they have a lot of nuclear exposure right now, which is pretty popular.

And they do deconstruction side of things as well. So for something like WSP and Stantec, they're pretty much solely like engineering consulting type, where Atkins is a little bit of a difference in business makeup. Like if you were to just solely look at the numbers of these companies, let's just say revenue earnings, free cash flow, whatever it may be, from a fundamental standpoint, this drawdown makes almost no sense.

Like how badly these companies are getting beat up. Again, like most of them are reporting record sales, record margins, record backlogs, guidance is increasing. On the surface, it kind of looks like one of the biggest,

disconnects on the market. I would say worse than even software for a lot of people. And I say that because it will eventually, shocker kind of roll into AI being one of the reasons why these companies are facing. Just for context here. So I'm showing a chart of the drawdowns just over the last year for both WSP Stantec and Atkin Realist. WSP Stantec around 40% and then Atkins Realist doing better,

but still a drawdown of 20%. So you can see, You can tell very clearly that the sector is not being very love right now by the markets. No, that would be an understatement. Yeah, because I'll pick one company in particular, and again, I think you own WSP. Yeah, I do own WSP. Yeah, I've been adding a little bit too recently as well, just because it looks so cheap and I'm willing to take the risk that it gets disrupted by AI or there's AI fears around it.

It's not a big position for me. So I just feel like it's pretty compelling value. And yes, there's risk. But at this kind of valuation, I think you're getting compensated pretty well to take that risk. Yeah, I would tend to agree because I've been buying, I've been buying a lot more of it now than I was last year, which is a good thing because last year was in the high 200s. But I'll pick that company in particular because I own it. So I follow it a lot more. we've seen multiples pretty much get slashed in half from historical numbers.

I actually do think the sell off in engineering companies is worse than the software companies for the sole reason that the engineering companies have been sold off while the underlying numbers just keep improving. So prices have fallen pretty much the same as software companies, but the growth in earnings, the growth in free cash flow has led to the multiple compression being much more severe. So WSP is trading at pretty much 50% discounts to its five-year historical price to free cash flow and price to earnings. And even if you want to argue that we take COVID out of that because five-year would be 20-26 to 2021. So let's just say we go 10-year.

It's still 40% below historical valuation. So the market is just obliterated the valuation multiples. They're willing to pay for these companies. Price to earnings to growth ratio, which compares their expected growth rates in the future to their earnings to their price now is 0.23. Typically anything under one is deemed of value. Anything slightly over one is kind of deemed, you know, pretty fair value, but under one would consider, would be considered valuation. Yeah, the metric that Peter Lynch in like the famous, right? Yes.

The peg ratio. The one caveat with this is it relies a lot on it's obviously forward analyst estimates, but I will get to the analyst estimates in a bit because there's a pretty important thing to discuss there. And I'm not really oblivious to the fact that the market just doesn't randomly sell down stocks. I think you see that a lot in the space today as people just kind of scream from the mountaintop that a stock is cheap and the market's dumb. there, like, the market is pretty efficient at pricing in what it believes will happen. So if you're buying this right now, you still be wrong. To be fair, the market can still be wrong. That's, yeah, that's exactly it. Yeah. So the market's going to be 100% efficient at pricing in whether or not they believe AI will disrupt WSP. Your advantage here is you have to figure out if the market is wrong because the market has been wrong numerous times in the past. But right now,

the supposed headwind for these companies and what the market is pricing in right now. Unless I am completely missing something, but I just don't know what else would cause the drawdowns in these companies is AI. I know WSP to a certain extent the market doesn't really like the leverage. We've seen this. Having cash on hand is essential for any business. Traditional business accounts hit you with high fees while paying little to no interest. on the cash you need for day-to-day operations.

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no branch visits because, Let's be honest, no business owner has time for that. We use it for our own business, and it's the first account that actually helps our money work harder while keeping operations simple. Check it out today at eCubank.ca slash business. Earlier this summer, we rented a beautiful cottage on Airbnb in Valdemo, Quebec, along Lake McGregor, less than an hour from Ottawa.

It was amazing. The hosts were great, and my daughter spent most of her time swimming with her paintings. floaties. On the one rainy day, we took her to patatsi patata, a local chip truck for her very first puts in. It took some convincing to get her to try that first buy, but once she did, she loved it. The best part, by bedtime, she was worn out and my wife and I got to watch a sunset from the hot tub. As I was enjoying this beautiful cottage by the lake, it got me thinking, instead of leaving our home sitting empty, we could be listing our space on Airbnb and giving someone else a home base

to explore our beautiful Ottawa neighborhood, Westboro. Our guests could start the morning with coffee at Ecuador coffee, then spend the afternoon by the water at Westboro Beach. Or they could spend the afternoon playing outdoor games at Tavern on the island right next to the Ottawa River. And we could put that extra money towards our next trip. Your home might be worth more than you think find out how much at arbnb.ca slash host okay so what's the reasoning behind a i disrupting engineering firms because i have my ideas behind it but i'd like to hear you so in in my view the case is pretty simple a lot of these engineering companies bill by the hour so a lot of the mundane tasks that these companies do that they build who clients could just

be easily replaced by AI. And last year ACOM spoke about this, but they spoke about it in a bullish way. So the impression they gave is that AI is going to replace jobs in their company. But they mentioned it would be a bull case because they do not need to add labor to grow. Labor starts to become a fixed cost. And they mentioned that for every 1% of labor cost savings, it leads to a 20 basis point expansion to margins. So even in the instance,

let's just say a single AI can replace five employees, I don't know. And they can, they get rid of that staffing cost. Is the margin, will the margin offset be enough to the point where the company profits more anyways? You know what I mean? Like, in theory, if you can use AI to do a lot of these jobs, and you have to, you know, you get rid of your staffing and the AI is doing the job

and your margins expand to the point where even if sales fall, your profits go up, like have you really been disrupted? Or is it a tailwind? That's kind of my thoughts there. The disruption level is, I think it's just in the replicating because billable hours is a big thing in this space. It's like, I think it's 40 or 50% of WSV's business. And I think when ACOM mentioned that, the market got a bit spooked because this would have been, well, it was late 2025.

And this would have been right around when a lot of these companies started getting absolutely hammered. I think the market kind of took it just confirmation of the situation of AI, definitely taking billable hours away, which I'm not arguing that it won't. It probably will. But I think it's a tailwind, which I'll talk about in a bit, because I know you, you have. have some commentary on this. But the one thing I'll say is in terms of the estimates that I had mentioned before, like with the PEG ratio, I did some digging on the estimates. There has been so many downgrades in these engineering firms in terms of price targets, but earnings estimates haven't moved. Some of them they've increased. So they're increasing earnings expectations while

cutting price targets, which means it's all valuation and multiple compression. So the analysts just, like to me, that means they think disruption is coming, but not soon. But yeah, I don't know if you have any comments around that. Yeah, I mean, I just find it pretty interesting. So I was showing here the price targets and also the earnings per share estimates. But yeah, you can see that for the most part, even the targets are actually relatively bullish from this standpoint. The price targets have them. By the end of next year, kind of 216, it's trading at 160 and those are the low and it goes up as high as above 350, 359, and then the median or consensus around 283. So you're looking at at least analysts and you have to take that with a grain of salt because

analysts are typically more on the bullish side than not. So I think we have to be fair and transparent, even for the companies that we do own, that even though we're bullish, you have to take what analysts say with a grain of salt. But for my perspective, there's kind of twofold. So on the one side,

yes, AI, I can understand the billable hours concerns, but you still need like what client or customer of the WSP Global would just want to rely on AI, right? Like, they'll still go to them because you still need those engineers to put their seal on the project, to review the project. Because can you imagine the liabilities if you just use AI and it messes up? Like, that is something.

Yeah, it won't happen. No, exactly. So you still need to have that professional human reviewing the project and the work. And sure, it could reduce billable hours, but maybe they start looking at a little bit more of a hybrid model, which includes a certain amount of hours, but also is based on the project. Like, they can change their way of billing customers

to properly reflect the output that they're providing in terms of work. So, yes, I understand there are some concerns there, but it's not like they have to stick to billable hours forever either. Maybe they just start going more towards like a project cost. versus just a billable hours cost. I mean, if you do renovations in your home, you typically have two options, right? If you ever had quotes, you might have someone that will give you, like for hugely big renovations, it'll be kind of like a cost, and then you have a plus, a kind of 10% variable

on it for the whole project. But smaller projects, oftentimes you'll have the option, whether you want like a full cost or something more by the hour. So it's not like it's unseen in other industries either. Yeah, I think there's a level to the like the mundane work. There's a lot of paper pushing in industries like this that are not, well, I guess in this particular industry that is not like critical, I guess you could say, but on the, on the end side of it, like when you're, I mean, stamping those drawings.

that put a bridge in place or a highway or anything like a high-rise building, I don't see any situation in the next, I don't know, decade or two that they would ever pass that off to AI. I just don't really see it. It would be, I mean, I wouldn't really want to go on a bridge that was 100% engineered and stamped approval by chat GPT. Obviously, that's it's a bit extreme of a case, but there's, I don't know if they're selling off based on that. I think they're selling off based on the billable hour situation because a lot of the stuff, I mean, it's the same situation with a lot of industries, let's just say accounting, let's just say law, where a lot of the stuff is very easy tasks, I guess you could say,

and they're billing very high dollar amounts for those tasks because obviously these companies are getting paid to do so. And if you get AI in place there, it creates a bit of an issue. But there's also the flip side, like I mentioned, which I'll get into it a bit, where I just think it's going to improve margins to the point where the, let's just say the slowdown and actual sales growth is irrelevant because they're going to profit more. But I'll get into kind of what's not going wrong and quickly because I kind of already went over. over a big chunk of it, but the backlogs are at record levels. So WSP, I think, has 11 months worth of revenue on the backlog. It might be closer to a year now. It's up 23% year over year.

Stantex is up 18% year over year. Jacobs, which would be similar company in the United States, 28% a year over year. I think realistically, if there was short-term disruption here, you'd probably see it in the backlog. Maybe not now, but maybe over the next year, which is probably why, if there is disruption coming to this industry, it's probably a while down the road. AI right now, at least, is actually fueling the business,

not really in terms of implementation, but just in terms of build out. Jacobs mentions that data centers now account for a double-digit portion of revenue, like the engineering portion of this. It's data center backlog doubled. WSP mentioned data center revenue has increased 20% year over year. And I know Stantec is doing quite a bit of the, the data center engineering jobs here in Alberta.

There's just really been no sign of a slowdown from, from many of these companies operationally. The pace is actually accelerating. The only thing I guess you could say that is bearish a bit in terms of results is WSPN, StanTech organic growth is slowing, but both of them just kind of attributed to project timing rather than dealing with any sort of real slowdown. So just getting into the whole.

AI situation, there is a big employee problem in this space. So as fast as these companies that have been able to grow over the last 10 years, 10, 15 years or whatever it may be, the pace of growth actually could have been faster, but the employees, like the staffing is the bottleneck. So according to some studies, the engineering workforce is growing 1% a year, whereas the actual demand for engineers is growing 5%. So yeah, if you get into a situation like that, you're just not going to be able to book that backlog in fast enough or as fast as optimal because you just don't have the staff. So I follow WSP for quite a bit and you like staffing is constantly an issue. They constantly say they cannot keep talent, can't keep enough talent for the amount of demand they have.

So in terms of the AI, whether it'll be a tailwind or a disruption, like you have a lot of narratives at play here. And this situation is probably one of the more interesting ones on the market. And you have Arcadus, which is actually the company that WSP was trying to buy. Well, it was a couple of weeks ago. They ended up backing out of the offer. I think it was just early October. They announced a bunch of layoffs. And then you have a company like Accenture, which is the conservative.

consulting company, different industry. Yeah, very different. Very different. Like they're, but they announced 11,000 employee layoffs as well. So Arcadus didn't mention AI as a reason for the layoffs, but Accenture did. They're going through a big restructuring. But you have a situation, you kind of have a situation where if clients figure out what AI is capable of doing, they're probably going to go to these companies in an attempt

to push fees lower. So like the, the businesses thrive on the people. hire because they can usually charge by the hour for those people. So if AI replaces those people, you potentially have an issue. But on the flip side, as I had mentioned earlier, you have a situation where even if revenue slows, margin expansion could more than offset this. WSB could realistically deliver best of both worlds. And that would be Stantec as well. I just, I'm so used to saying WSP just because it's the one I follow the most. But if you have a situation where you can do both things.

You can give clients cheaper engineering work because you're using AI and because you're using AI you need less manpower and your margins increase you make more money. So I don't even think

revenue will fall though realistically because if you go back to the main issue I talked about with the issue these companies have which is staffing, AI could open the door to kind of satisfy a lot of that demand

in terms of staffing, which will allow you to push the backlog through faster, which ultimately will increase sales. So, yeah, it's, you could end up having a situation where you not only have reduced costs, higher profitability, even in the midst of lower sales. That would be probably worst case if revenue starts to decline. So obviously I own WSP.

I'm very bullish WSP, but I do think, like, if I were to bet, and obviously I am by owning it and buying it, I think you're going to see AI be a tailwind, not a headwind. And this isn't even mentioning the fact that there is almost zero chance that they're ever at the point where they're passing liability off to AI, as you mentioned. Like these engineers are the stamp of approval, the liability for a lot of these critical infrastructure. And that's, again, it's like a critical part of the business, but there's a lot more moving parts underneath the surface for these companies. But I mean, I can't see that happening anytime soon. And yeah, just like on a forward earnings basis, they're trading at only 14x expected earnings near 8% free cash flow yield.

And I guess just kind of a final opinion. I think it's the whole re-rating is off of a story. And I say that primarily because of the estimates. I know the estimates are still fairly bullish, but they're getting downgraded is the thing. So the targets are coming downwards, which means, or sorry, the targets are coming downwards and earnings per share. are either staying steady or growing. And you showed that chart earlier. They're actually growing for the most part,

which means analysts at least are thinking the market is going to pay less for these companies moving forward. And other than the AI disruption, why else would you just decide to not pay as high a multiple for these companies? So because again, record backlogs, record margins, raising guidance, a ton of insider buying. And yeah, there's a level of uncertainty here. We have absolutely no idea how advanced AI, will be in five years, 10 years.

I mean, even what, three, four years ago, we had that video of Will Smith, like, eating the spaghetti that was, like, one of the first ones that ever came out. And now it's like you can't even tell the difference. It's, it's pretty wild how fast it's advancing. So could be wrong.

I've been wrong on plenty of investments over the years, but I just don't buy it for these companies. Now, whether or not, like, I don't know when it flips, like when sentiment flips. Like, I think you need some sort of maybe AI implementation in these engineering companies that's proving to boost margins. Or you need like, I don't know, multiple years worth of worth of a situation where I was going to say, I think time will tell. I think that's probably it. What the market is doing, it's pricing in some additional risk with it's not without risk, right?

you do, there is a bare case to be made that companies will start negotiating down contracts and just say, you know what, we'd like better pricing on that. And then it becomes a bit more of a pricing wars between different engineering firms. I guess that would be the most bearish case. But I'm with you. I think there is definitely, I think the argument for the stock being bullish, especially considering how low the valuation is right now. I think I would put, well, I mean, I'm buying some more as well. So I'm putting my money bit over that versus being bearish on the company, but it's not without risk. I think that's just, we just have to be clear about that. Yeah, like if we go back to 2012, like since 2012, WSP has compounded earnings per share at

14%. There's very few companies that can grow that much over a course of 14 years that are trading at 14x earnings. So the results are not an issue right now. It's, It's the story, which makes it a little more difficult, I guess, because you truly never know what will happen in the future, especially with AI. Like, we have no idea what it's going to do in five years, which makes this a bit more complicated. But yeah, it's, if you're wondering what is happening in this space, because it's pretty much a bloodbath all the way around, it's, this is pretty much it. Okay.

Now, I think that's a good overview. Having cash on hand is essential for any business. Traditional business accounts hit you with high fees while paying little to no interest on the cash you need for day-to-day operations. That was our experience too, until we switched to the new EQ Bank business account. Now, every dollar earns high interest with no monthly fees and no minimum balance. You also get free everyday transactions like EFTs, bill payments, mobile check deposits, and 50 outgoing and 100 incoming free interackey transfers. And to sign up, quick and fully online. No branch visits because, let's be honest, no business owner has time for that.

We use it for our own business and it's the first account that actually helps our money work harder while keeping operations simple. Check it out today at EQBank.ca slash business. Earlier this summer, we rented a beautiful cottage on Airbnb in Valdeymo, Quebec, along Lake McGregor, less than an hour from Ottawa. It was amazing. The hosts were great, and my daughter spent most of her time swimming with her pink floaties. On the one rainy day, we took her to patatsi patata, a local chip truck for her very first puts in. It took some convincing to get her to try that first buy, but once she did, she loved it. The best part, by bedtime, she was worn out and my wife and I got to watch a sunset from the hot tub. As I was enjoying this beautiful cottage by the lake, it got me thinking,

Instead of leaving our home sitting empty, we could be listing our space on Airbnb and giving someone else a home base to explore our beautiful Ottawa neighborhood, Westboro. Our guests could start the morning with coffee at Ecuador Coffee, then spend the afternoon by the water at Westboro Beach. Or they could spend the afternoon playing outdoor games at Tavern on the island right next to the Ottawa River. And we could put that extra money towards our next trip. Your home might be worth more than you think. Find out how much at Airbnb.ca slash host.

Let's move on here to just eating unhealthy with fast food restaurants. I wanted to go over that presented by our great sponsor, EQ Bank. So in terms of fast food, what's the first restaurant that do you think about? McDonald's. I had it yesterday. Because I needed somewhere to go. That was the first one I thought of Big Mac combo. I don't eat at McDonald's very often.

So how much was that? Because it's actually leading into what I'm going to show here. I really didn't pay attention. It was, I know for certain it was like over 14 bucks. Okay, so you had what that. So a Big Mac, you had some fries and a soft drink type of deal? Yeah, like no supersized or anything, if that's still a thing. Supersize me, yes.

The movie. I think the guy passed away. way a few years ago with that movie. Yes. Yeah, he did. So I'm just showing here for those on YouTube. So it's a really interesting interactive map to look at. You can go and see it for yourself, big mac index.

Dot app. And the Big Mac index is something that's been, something that's been talked about for years. I can't believe we haven't talked about it, I think, on the podcast ever before. And what's really interesting is you can look at the map and then I just put the price of one Big Mac. and then you look at the price in every country.

So in Canada, the average is 817 for Big Mac. In the U.S. is 622 in U.S.D. But 817 Canadian would be 581 U.S. So I guess in Canada, when currency exchange, I guess it's slightly cheaper. And you'll see on the map wherever it's like redder, it's where it's more expensive. And then the more yellow it is, it caused the less. I believe, yeah, it's just there.

just estimates and not really based on data when you see something like green. And there are some countries like Russia that doesn't have any McDonald's. So you have to keep that in mind. But it's just interesting because it's it's been used now by a lot of economists to just show in terms of kind of inflation and where it's going over time. And I went on McDonald's app. And it's good that you actually talked about it because I wanted to see the price of a Big Mac near me. So the McDonald's the closest. So I use on the McDonald's app because oftentimes Uber eats, even if you do pickup, it's actually a surcharge. So it's a bit more expensive. So on McDonald's app, it was $7.99 for me. So that kind of aligns with the $817. And that compares to around $2.77 in 2000 and $677 in 2019.

So since 2019, Big Mac prices have actually increased 21% in Canada. So that doesn't sound like too bad. I feel like food has increased more than that if I had to just get. If I had like without just going on vibes alone, I would say food is probably up 35, 40% for me in that time span. Like that's kind of my general assessment of it. I guess you're going to feel it different. You're going to feel it differently everywhere, right?

Like people who buy a lot of beef have obviously seen beef skyrocket. I just logged into my credit card here. It was 1220. 1220. That's okay. So Alberta, go to Alberta if you're looking for cheaper. Yeah, cheaper Big Macs. And people might wonder, but something that's important to clarify here is McDonald's, like the headquarter, the parent company, they don't set prices for Big Macs. So like Big Macs are actually, the prices are set by franchises and that's really important. It's a key point here. Yeah, a lot of people don't know that because 95% of their restaurants are franchises and not corporately owned. So keep that in mind as I go through this. Now, looking forward, McDonald had their investor day a few weeks ago and made a lot of

headlines. So the first big takeaway is that they're not expecting a strong restaurant backdrop for essentially the rest of this decade. They're expecting traffic to be roughly, flat while inflation remains elevated and traffic that's restaurant traffic. So essentially what they're saying is saying, you know what, if we want to gain market share, we have to rein in cause by using things like loyalty programs while we have to rein in costs if we want to make sure our franchisees remain profitable, but we also have to use things like loyalty programs, personalization, redesigning restaurants, AI for automation and increased productivity. They're focusing on fixing the menu and the customer experience over short-term

promotion that might result in a temporary spike of sales, but isn't sustainable. And that's something that the restaurant brands international also mentioned. And they see that there's a lot of opportunity in chicken and beverages, specifically. They own about 40% of the beef market for restaurant. I didn't know that. And it's in the low double digits for chicken and then single digits for beverages. And the way they see it is like, you know, when you're off peak hours, take beverages, for example, if you can get people to come to McDonald's, have a coffee, to have a drink or whatever it is, like not booze, but actual like different types of drinks, while you're kind of maximizing and able to increase your sales in times that they're off peak

hours. So that's a bit of a strategy they're focusing on. And they really, one of the major thing that they identify is they have to focus on value, but not just the price, but the overall value that the customer is getting. Because when you think about it, if it's just focused solely on price, there's always going to be an alternative to McDonald's or any kind of restaurant that's cheaper nine times out of 10. And that's going to the grocery store and making your food yourself. Yes. So they have to provide some additional thing here. And that's a challenge that they're facing on the value side because with rising food costs, how can they provide value to customers, especially those in the bottom half of that like key shape economy. They did talk about JLP1 drugs

and they estimate that 10% of adults in the U.S., fun fact, based on McDonald's, that 10% of US adults use the drug, the weight loss drug. That's wild. That's wild. And but they say it's an opportunity because 84% of households with at least one use, user within it visits McDonald. So they see it as an opportunity to be able to change your menu or add some things to their menu with some more compelling options and some smaller portions. On the part of AI, it's really using it a productivity. They mentioned using it, for example, for taking order in English or Spanish. So they've had some pretty good success doing that. And the problem is, and that's one of the biggest issue, is these initiatives are expensive.

So the cost for implementing remodeling and new menus and rejigging everything, they estimate that it's around 800,000 per restaurant in the U.S. And 650,000 to 700,000 outside of the U.S. So that's why they're anticipating providing about $8.5 billion in support to their franchisees through 2036, with $5 billion coming between now and 2030. And that's key, I think, because if you're looking, like, you have to look at their comparable sales and it's just not looking good. So if you start looking at comparable sales here, and it's even rougher on the U.S. side, so this is global.

So their most recent quarter, Q2, they had 1.3% comparable sales. So it is very weak. And if you're looking at the U.S. and the call itself, they said that they had comparable sales declining over the last couple months. So they essentially talked about Q3 and they have enough data to essentially talk about Q3 as almost as a whole. And they anticipate declining comparable sales in the U.S. Wow. Like just in the U.S.

because this would be probably global. Yeah, that's global. Yeah, they don't have the KPI for just the U.S. Unfortunately. Yeah. And that was something they mentioned on the Investor Day presentation. So they didn't give specific number. They just essentially, I guess, and that's why I think the stock got hit fairly hard in the last couple of weeks there.

I think it's some of the commentary that they heard on that call, essentially management saying, you know, what we need to. There's some improvements we need to do here. And definitely with the negative in sales in the U.S. not that great. comments here before I get into restaurant brand international? Well, and I think just a situation with McDonald's and like I don't know the structure 100%, but I'm pretty sure they own all the buildings. Do they not? They own the buildings and they own the land.

In some cases, so there's different types of franchises. So there's somewhere, yes, they'll own the building and kind of leasing back to the franchisee, but there's other types of franchises where the franchisee is responsible for the building. So it depends. I think there is more of the type you're saying in North America and then in other countries around the world, it's the other way around. But the general franchise kind of model, if we just take it as one general model, it's 95% of their stores or franchises. Yeah. And just looking this up here, McDonald's owns approximately 70 to 80 of the physical restaurant structures. So I think, have you seen that?

chart of the 10-year bond yield and the McDonald's price? No, I didn't see it. You should look it up and see. Just go to X and just look up McDonald's tenure and you'll see it. You can show it because they've moved in exact unison. Like 10-year yields have gone up 32% and McDonald's has declined 32%. It's like almost identical because I think they have a lot of real estate exposure, obviously, in higher yields are not good for a company who has a ton of real estate exposure. So I think it's like

it's like a double whammy for McDonald's. They're getting hit on just the fact that not a lot of people are going to the restaurants or at least not enough to drive any strong growth. And then you have potentially higher rates of interest for a lot of the real estate, things like that. So, yeah. No, I can't find it, but that's okay. So I'll just continue here and just for, our listeners. So what I'm showing here is just the total restaurants, the system-wide restaurants, and the franchise is one. So system-wide is 46,000. Franchises 44. So right around that 95% number that was mentioning earlier. And there's some interesting things that are pretty consistent here between Restaurant Brands International as well and McDonald's. So Restaurant Brands International,

like I mentioned, they owned like the two big franchises are Burger King and Tim Mortons. And of course, they have Popeyes and Firehouse subs. And for them, I mean, it's been a mixed bag, I would say for them. I'm just trying to. So if you're looking at comparable sales, it's a little bit of a mixed bag. So you have Tim Morton's that's kind of trending down a little bit towards flat. And then you have Burger King that's doing pretty well with 8.6% comparable sales. in the last quarter and you have fire, you have Popeyes that is just a tire fire for been

like that for like a couple of years now, like deep in the negative in terms of comparable cells. So they said something very similar to McDonald's. So value is key here. They said may mention that in a conference hosted by Barclays. Value has to be consistent, not just based on promotion. Same thing as McDonald there. And value is found is found in better food quality. something that McDonald also mentioned on their call.

But what's interesting is, especially Burger King, is that they essentially are doing the investments that, while they've already done the investment that McDonald is saying that they're going to be doing with what's called their next program, so the massive investments, the support, the $8.5 billion supports for franchises, that's their next program, where Burger King in 2022,

they announced the program of Reclaim the Flame for Burger King. And essentially they're saying that that program is the reason why you're seeing comparable cells. I really pick up now with Burger King where people are more willing to go to the restaurant because it's a nicer atmosphere. They're seeing some better quality, some better menu selection. So it's really a lot of the things that McDonald is mentioning they want to achieve for their franchisees that Burger King actually did. Yeah, and it's the value thing kind of came into play with Tim Hortons, I think, like, in 2023, 2024 when Starbucks was going in the tank

and Tim Horton's kind of because you could tell people were shifting from $6.00 lottes or whatever, maybe to like a $2 large coffee at Tim Hortons. Yeah, I'm surprised to see Burger King doing as well as it is, but I haven't paid attention to them too much in terms of transitions. I guess it's probably a good sign for McDonald's. if they could do the same thing

but it's also time right so this is 2022 so yeah yeah they didn't really start seeing I think that for it took about three four years yeah to see like the fruits of that those investments and again it was to much lesser expense

I think it was around 250 million that they provide in support to their franchisees so much smaller than what McDonald is doing but McDonald's a much has a lot more store a lot more franchises than than just the Burger King brand within RBI. And they also mentioned on both sides how they're placing also a lot of importance on reward programs, customer loyalty.

We actually saw Canadian Tire and would try their triangle program kind of teaming up with Tim Morton. So you can earn some Canadian dollar dollars or triangle rewards by going there. And one key point that also came from McDonald's and RBI is really maximizing direct. restaurant during non-peak hours. So I mentioned that like quickly for McDonald's, but Tim Morden's are really interesting examples. So they say that about half of their sales for Tim Orins comes before 11 a.m. So it's hard to increase these amount of sales when you're likely running a capacity, right? Your capacity constraint at that point. Like you can just serve so many people at the same time. There's just so many cars I can't go through the, the drive-through. And how do

and trees sell during non-peak hours. You often different types of drinks or meals that can be appealing as a snack or afternoon beverage other than coffee, for example. And that's something like I said that McDonald pointed out. And one other thing too that they mention is that they've seen that customers want value, but value in different ways. Like they want, if they're going to go out for food, it's nice to eat in an environment that's like, you know, not a dump. That's not an environment that's been built like 40 years ago and the washrooms, you just don't want to touch anything because you're afraid of catching a disease, right?

So it's true, but it is something like they didn't. It's not what they mentioned, but that's my interpretation of what they're saying on the call. But what's also interesting with Restaurant Brian International, I didn't know that, but apparently management compensation targets are now linked to how well franchises are doing to make sure that the incentives are aligned. And just like Timor and just like McDonald's, their franchises are actually able to set the prices as well at Restaurant Brands International.

Although when they have some big promotions that they're offering, like nationwide, for example, they will get buy in from the vast majority of the franchises so that it's actually available at the pricing that is being advertised. You want to add before I continue here? Nope. No, no, go ahead. Yeah, and really, I think what they kept hammering on for boat restaurants is just offering value. And value, like I mentioned, comes in different forms here. So it's very hard to compete with grocery stores. Like I've said it before, and I think everyone listening can agree,

the grocery store is going to win nine times out of ten if you're just looking at the best pricing. If you're willing to put a bit of time to cook your food, it's going to win nine times out at ten. where you can get additional value, it's offering value to customer in terms of pricing, but also experience and making sure that you have an environment that's inviting, you have a menu that's easy to understand, you have a menu that's appealing for your customers, these are all different things. I mean, for McDonald's, they even talked about playgrounds a little bit, but I don't think they talked about it how they should have.

And you have kids, anyone with kids, can just think about it for a second. Imagine if a McDonald near you had a playground. I know some still do, but they're rare now. They're few and far between. Imagine if had a playground, you have two kids. You can go to McDonald's, buy some food, and make an afternoon out of it, and not have to spend money to go do another activity somewhere else. Like, that is value right there.

That was a huge thing in the 90s. Like, I remember going to numerous birth. Like, they're thinking about bringing that back. They are talking about. like that's something they're looking at. And to me, that's like a no-brainer. As a parent having kids, I mean, I'll go, like, I'm not a big McDonald's fan. I try to eat pretty healthy, but I'll go once in a while.

But if you're telling me that, you know, if it's raining or I have nothing to do for my daughter, that we can just go and have a lunch at McDonald's and then she can just play around and play structure for like an hour, an hour and a half. And we don't have to spend money somewhere else and find an activity for her. Like, that's some pretty compelling value right there that I think, I'm surprised they didn't hammer that a bit more. Obviously, that would be pretty expensive to add that to the existing McDonald.

But that's the kind of thing that you can add value without necessarily having the cheapest price. Yeah, I mean, they had them before. I don't know what, I'm not sure what they did with the space. But yeah, that was a huge thing in the 90s. Birthday party at McDonald's, eight kids running around, a bunch of parents, probably spending. Yeah.

You start selling booze to parents. They'll stay there all day. Now they might have to just have like a little section with a bunch of iPads. That's kind of the state of it now. But yeah. No, exactly. But I thought that was interesting. And they also spoke on inflation.

And that's a really interesting way to see it as well. So both said that inflation is obviously putting cost pressure on their operations. RBI, so restaurant brands international, said that they can't pass all of the price increases to consumers if they want to continue offering great value. And just like McDonald franchisees, largely deciding what prices they charge, it's the same thing with restaurant brands international. But one of the issues they have is franchises on both hands, so for both companies, they are often put in a tough spot because they may want to offer some compelling value at least

on the prices, but they can't go too low either. And that's where it becomes very difficult because if you're barely making a profit as a franchisee, are you able to reinvest in the business? Of course you're not. You're not going to be able to reinvest in the business. You're not making enough money. And they're definitely conscious of that where they have to be able to help out their franchises and make sure that, you know, the franchises are profitable enough that they

have sufficient funds to be able to reinvestment, reinvest in the business. So that's my, my first big takeaway is inflation is squeezing from both sides. So you have consumers that are just price sensitive and higher costs are making harder for franchises to operate. And a discount heavy menu and remain profitable is just that simple. The value is critical, but it's more than just cheap prices like we just mentioned here. They have to fight for market share. The overall restaurant traffic is not increasing. I think they were both pretty clear on that. McDonald was quite explicit about it,

but you could read between the lines for restaurant brands international. So essentially, they have to fight for market share. And the franchisees economics just have to make sense. Because if it doesn't make sense, I mean, you're also going to have more and more trouble attracting franchises for new stores. And that's another area that they can grow is opening new stores. I don't know what the franchise cost is, but I know it's not cheap for McDonald's, for example.

Let me look it up. Yeah, so it has to be at least half a million, if not more, a million dollars, right? Well, your franchise fee is only $50,000, $45,000, but your total investment for building interior guts and stuff would be anywhere from $1.5 to $3 million, it says. Yeah. Yeah. So if you're going to invest that much, I mean, I don't know about you, but I have to have some kind of assurance that I'll be able to make a decent profit out of it. Yeah, it's a pretty tough model right now. What I'll say, like where I live, there's been a lot of franchises that have opened up over the last while here.

And absolutely none of them are doing well because I think of just the current environment. Which one McDonald's? close. No, we've out of McDonald's here for a very long time, but we had like a couple Greek places like not Opa, another one. I can't remember the name of it. Yeah, that's fine. Yeah. Did not do very well because there's so much upfront costs with opening these things that like if they're barely making money right now and then McDonald's wants you to go and reinvest $800,000 into renovations, like are you really going to be, you know, going to be doing that, especially, like, I don't know, for me, McDonald's kind of boils down

to a quality thing as well. Like, yeah, I went because I was kind of time constraint yesterday. There was nothing else closer. Like, it would probably be one of the last places I would go to. Like, unless they had a playground for the kids. Yeah. If they had a playground, well, my, my kids are far from a playground. Yeah, they're close. But yeah, if they had a playground, 100%. If I was with the kids I'd pop in. But yeah, I think they have, they have a lot of issues. They have the real estate issue. They have the slowing sales issue.

And then they, they're sorry, the slowing traffic issue. And then they just have, personally, I think they just have the issue of not really being that good. But obviously that's anecdotal. Yeah, even from a value perspective, we did our video and our podcast on the ranking, you know, the, what was it, discount retailers? Yeah. And you're seeing a lot more demand for a lot of them.

But again, with inflation, at some point, yes, they're offering better value than other alternatives. But at some point, you just see people trading down or going to cheaper alternatives. And I think their biggest competitor for me is the grocery store where, yeah, that's going to be the biggest trade down you'll see. But typically McDonald's tends to, I think historically it's done pretty well in recessions. That's the last thing I wanted to check here. just how it did during the like the aftermaths of the gfc i think it did pretty well i haven't looked at it in a while but if you're looking at 2000 i mean i'm just clicking and dragging from yeah may 2008 to june 2009 it only it was flat so pretty well yeah better than a whole lot

yeah a whole lot of other kind of companies but if you're just trying to pull here like from 2008 to 2014 so it did pretty well during that time frame i'll finish on this note for our people just watching on youtube here so just looking at that 138% from i took march oh i missed so definitely i did not register the dates so you can forget about that they like i'm pretty sure just a quick look on yeah on like a yahoo chart they they did pretty good i think they're still the cheapest. Like in terms of fast food pricing wise, like they're much more expensive than they were, but I think they're still, they're still the cheapest. So they're probably still going to be attractive from that perspective on, you know, people who are just looking to purely save costs

and don't really care about quality. But yeah, there you go. Yeah, there you go. So within, so let's say in the pick of the financial crisis and the U.S. was really struggling. I think the worldwide economy was struggling as well. McDonald's from March 28, 2008, 2014, so that's six-year span. So you had those toughest years and actually did quite well in 2010, 2011, 75% during that time frame. But a lot of those returns actually came from, I guess, 2009, early 2009 to 2012. So a span of three years, you would have done quite well owning McDonald's. But that's because McDonald's has typically been a really cheap option and done well in recessions.

And now it's almost like we're seeing the opposite a little bit to happen. I know we're not in a recession, but there's a lot of things that we're seeing in the economy right now and especially the K-shaped economy that kind of reminds you a little bit of people acting like during a recession, at least a large swath of the population. So it's just interesting to see that divergence from historically how McDonald has performed. Yeah, I don't really have Oh here do you want me to show the I'll share my screen here

Yeah for the last chart and then we'll call it a day Because this episode's a bit longer than usual But that's okay oh wow okay yeah Yeah so this is the 10 year bond yield And McDonald's stock price from March of 2016 Or sorry 2026 like March of this year It's pretty much a direct

Replication chart by chart Which I think is Has to be direct reverse Correlation, right? Yeah. Like the real estate, maybe, I mean, McDonald's has always been a bit of a slower growing. Well, it could be that or just inflation expectations rising, right? Being reflected in the 10 year. That could be part of it as well. Yeah. Yeah. But yeah, it's, yeah, that's the last thing I got. Well, I hope you enjoyed this episode. I think it was a fun one. I enjoyed doing this research. I got into the rabbit hole listening to the conference calls and didn't realize how much the kind of

challenges that those fast food restaurants were facing and still and interested in listening what you had to say about the engineering firm. So hopefully you enjoy this episode. Make sure you let us know if there are certain topics you'd like us to talk about in future episodes. And we'll be back with a regular, well, not a regular, but a news and earnings episode on Thursday. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.