McDonald's Corporation MCD, the world’s largest fast-food restaurant chain, reached the billion-dollar brand status through sustained product innovation and geographic expansion. With almost 10% share of the global informal-eating-out market, there is ample scope for it to grow in the future as it boasts a scale advantage compared with its peers.
Resultantly, with an impressive share price appreciation and a Zacks Rank #2 (Buy), the stock is a profitable investment choice at the moment. Shares of McDonald’s have gained 11.4% over the past six months, outperforming the industry’s rally of 8.8%.
The company delivered better-than-expected earnings for the 17th straight quarter when it posted third-quarter 2018 results. Moreover, its earnings surpassed the Zacks Consensus Estimate, the average being 6.1% in the trailing four quarters.
Let’s delve deeper into factors that make McDonald’s a lucrative pick at the moment.
Impressive Same-Store Sales Growth
McDonald’s sales-boosting initiatives are driving global comparable sales. In third-quarter 2018, comps grew 4.2%, marking its 13th straight quarter of positive comps. Moreover, U.S comps were up 2.4% in the period.
In order to drive comps in the United States, representing about 40% of the company’s business, McDonald’s aims at improving focus on growing guest traffic. In this regard, the company is accentuating operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings.
In addition to this, the company is undertaking digital initiatives to serve customers more efficiently. Notably, nearly all of its U.S. restaurants now use digital menu boards. Further, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. Meanwhile, McDonald’s is increasingly focusing on delivery to provide augmented convenience to customers. The company provides delivery from over 15,000 restaurants.
Refranchising Initiatives to Boost Earnings
McDonald’s adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. Notably, in January 2017, the company entered a partnership and sold the control of its China business, thereby, reducing its own share to 20%. McDonald’s intends to add over 1,500 more stores in the region within the next five years. Currently, nearly 95% of the company’s restaurants are franchised.
In addition to the sale of its assets in China, McDonald's is looking for similar deals in markets of South Korea, Japan and Southeast Asia. In fact, it already completed several other important refranchising transactions, including Singapore, Malaysia, the Nordics and Taiwan. These partnerships are part of the company’s efforts to streamline its business and focus on the quality of its offerings.
We note that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth. Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains). In 2018, McDonald’s earnings per share are expected to grow 16.5%.
Valuation & Dividend Yield Look Cogent
Looking at McDonald’s Price-to-Earnings Ratio (P/E) in the trailing 12 months, investors might be willing to pay more as the company is undervalued compared with peers. Its P/E ratio for the trailing 12 months stands at 24 while that for the industry is 25.3.
Meanwhile, McDonald’s current dividend yield stands at 2.2% compared with the industry’s figure of 0%.
Other Stocks to Consider
Other top-ranked restaurant stocks are BJ’s Restaurants BJRI, Darden DRI and Dunkin’ Brands DNKN, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings for BJ’s Restaurants, Darden and Dunkin’ Brands for the current year are projected to increase 66.5%, 16.8% and 16.9%, respectively.
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