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Modern Initiatives Boosting Growth at McDonald’s

Stock (Symbol)

McDonald’s (MCD)

Stock Price

$173

Sector
Retail & Travel
Data is as of
December 3, 2017
Expected to Report
Jan 30
Company Description
McDonald’s franchises and operates McDonald’s restaurants  in 119 countries globally. All restaurants are operated either by the Company or by franchisees. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time. MCD owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. Source: Thomson Financial
Sharek’s Take
David SharekMcDonald’s (MCD) has embraced technology with its modern stores, McDonald’s app and digital ordering kiosks, keeping the company on the fast-track in a digital world. McDonald’s is giving its stores a fresh and inviting look with its Experience the Future campaign with a new modern look, digital self-service kiosks, and McCafe desert counters. These new improvements are now in 1/4 of the restaurants worldwide. MCD has also has an app you can order — from, for mobile order and pay — which is in 20,000 restaurants. The app shows promotions as well as coupons. The next growth opportunity is food delivery. McDelivery is now available in 20% of the restaurants around the world. In the U.S. MCD uses UberEATS, with 75% of Americans living within 3 miles of a McDonald’s restaurant. Also, the company just announced an enhanced dollar menu for 2018:

  • $1 menu items: Cheeseburger,  McChicken, Sausage Burrito, Any Size Soft Drink
  • $2 menu items: Bacon McDouble, 2 pc Crispy Tenders, Sausage McGriddles, Small McCafé Beverage
  • $3 menu items: Triple Cheeseburger, New Classic Chicken Sandwich, Sausage McMuffin with Egg, NEW Classic Chicken Sandwich, Happy Meal

These improvements are helping boost same store sales (SSS). Same store sales jumped 6% last qtr — a solid figure from such a large company. If it’s one thing that doesn’t look good with this stock it’s that profit growth was on a solid two year run where qtrly profits grew 20%, 16%, 22%, 15% 16%, 9%, 20% and 19% before declining to 9% last qtr. With profits expected to climb an average of 7% the next 4 qtrs, I can imagine this stock taking a breather. Especially seeing the P/E of 25. The stock had a median P/E between 17 and 21 the past four years. Outside being a little overvalued, McDonald’s stock is a solid core holding. It is one of the safest stocks in the world, with a dividend that’s increased for 41 consecutive years (thru 2017). Management just increased its dividend 7% to $4.04 a year, which is a yield of 2%. In 2016 the company spent $14 billion on dividends and share repurchases. MCD is a core holding in the Conservative Growth Portfolio and these modern initiatives keep the outlook bright into the future and beyond.

One Year Chart
McDonald’s did have sales decline 10% last qtr, but that was due to accounting adjustments with franchises that took the percentage of franchised restaurants from 81% to 91% in 3 years. More importantly, SSS increased a solid 6%. 3-4% with McDonald’s would have been good, 10% SSS at any restaurant or retailer is exceptional. But profits increased just 9% last qtr, with qtrly Estimates for the next 4 qtrs of 10%, 5%, 3% and 9%. MCD met estimates last qtr, and future estimates didn’t move much, so its possible MCD could be delivering profit growth in the 5-100% range over the next year. The company did 14% growth on average the last 4 qtrs. So slowing growth could be upon us.
Fair Value
McDonald’s had its P/E rise from 17 to 21 the past five years. AS the company entered a new era of growth (more advanced stores). Now with profit growth slowing a bit, I feel the stock is a little high with a 25 P/E. Still, the lines are still long at locations all around the world, and that’s a good thing. My Fair Value is a P/E of 24 which is a $168 stock in 2018.
Bottom Line
McDonald’s is on the fast track with technology inside the store and at-home delivery. Plus the company knows how to boost sales with its dollar menu, then offer chef-crafted burgers and artisan chicken sandwiches premium sandwiches which have higher profit margins. My issue with this stock is the P/E is 25. The last time the annual median P/E was this high was 2007. Still, new initiatives and solid same store sales growth will keep the company moving in the right directionMCD ranks 21st in the Conservative Portfolio Power Rankings.
Power Rankings
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