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McDonald's Expansion Strategy Strong, Slow Asia Growth a Woe

Zacks Equity Research

McDonald's Corporation’s MCD deepened focus on delivery, growth in international markets, accelerated deployment of Experience of the Future (EOTF) restaurants and sales-building initiatives bode well.

However, high labor costs, lower-than-expected earnings for the three straight quarters and currency headwinds are major concerns. As a result, the stock has gained 10.7% so far this year compared with the Zacks Retail - Restaurants industry’s 20.3% rally.

Let’s discuss the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


 

Key Catalysts

McDonald's efforts to strengthen its position through various sales endeavors along with increased focus on franchising augur well. To raise customer confidence, McDonald’s is directing its sole concentration toward delivery.

During the third quarter of 2019, the company partnered with Grubhub for the rollout of McDelivery to nearly 500 restaurants in the NYC and Tri-State area. It also tied up with DoorDash in the same period for enabling customers to access their favorite McDonald’s menu items whenever and wherever they want by placing orders on mobile and pay or via McDelivery.

Moreover, the company’s sales-building measures are driving global comps. The metric grew 5.9%, when the company reported third-quarter results, marking its 17th consecutive quarter of positive comps. Also, U.S comps rose 4.8% in the same quarter.

In order to boost comps in the United States, McDonald’s aims to improve its guest traffic by focusing on operational excellence, product innovation, offering a value menu and unveiling more limited-time offerings. The United Kingdom reported quarterly like-for-like sales growth for the 54th time on the trot.

McDonald’s is consistently trying to improve its performance in the international market including Australia, Canada, France, Germany and the UK. The company intends to aid comps growth in these markets through introduction of value meals, customizing the menu to suit local customer tastes, reimaging restaurants, efficient marketing and promotions, improved service and increased convenience via delivery.

The guest count  being the company’s top priority, McDonald's focuses on enhancing food quality, increasing comfort level and adding service value to woo customers. Moreover, velocity accelerators of EOTF , digital and delivery are expected to fuel growth in the long haul.

Concerns

The company’s lower-than-expected earnings are a persistent concern. In three of the trailing four quarters, its earnings lagged the Zacks Consensus Estimate, the average negative surprise being 0.4%. In the third quarter, adjusted earnings came in at $2.11 per share, which missed the consensus mark of $2.20. The bottom line also dipped 2% from the prior-year figure. Following the earnings decline, estimates for the current quarter and year have been revised by 3.9% and 1.9% downward, respectively.

Of late, the company is grappling with difficulties like decelerating growth in Asia along with weakness in some parts of Europe.

With majority of McDonald’s operating income coming from the International operated segment, its earnings remain vulnerable to adverse currency translation. In the last reported quarter, foreign currency movement had a negative impact of 3 cents per share.

Key Picks

Some better-ranked stocks in the same space are Chuy's Holdings, Inc. CHUY, Arcos Dorados Holdings Inc. ARCO and Bloomin' Brands, Inc. BLMN. Chuy's Holdings sports a Zacks Rank #1 whereas Arcos Dorados and Bloomin' Brands carry a Zacks Rank #2 (Buy).

Chuy's Holdings’ earnings surpassed estimates in three of the trailing four quarters, delivering a positive surprise of 8.7%, on average.

Arcos Dorados’ 2020 earnings are expected to rise 35.5%.

Bloomin' Brands has an expected earnings per share growth rate of 9.8% for three to five years.

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