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McDonald's (MCD) Hits 52-Week High, Can the Run Continue?

Zacks Equity Research

Shares of McDonald's Corporation MCD have gained 9.7% compared with the industry’s 9.3% growth in the past three months. Moreover, the company hit a 52-week high of $206.39 on Jun 25, though it eventually closed at $205.71. Notably, McDonald's various sales and digital initiatives as well as positive comparable sales bode well. However, revenues have been under pressure for quite some time due to strategic refranchising initiatives. Let’s delve deeper and find out whether the company can continue its bull run in the near term.

Growth Drivers

McDonald’s sales boosting initiatives are driving global comparable sales (comps) growth. In first-quarter 2019, global comps grew 5.4%, marking its 15th straight quarter of positive comps. Also, U.S comps were up 4.5% in the same period. In order to boost comps growth in the United States, representing about 40% of the company’s business, McDonald’s aims at improving its focus on growing guest traffic. In this regard, it is imperative to mention that the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings. The United Kingdom reported 52 straight quarter of like-for-like sales growth. Meanwhile, Australia, Canada, France, Germany and Italy are all witnessing robust improvement in sales.

In the International Lead segment and high growth markets, McDonald’s strategic efforts are consistently driving comps higher. In first-quarter 2019, the International Lead segment witnessed comps growth of 6% year over year, higher than a 5.2% rise registered in the last reported quarter. Robust sales in the United Kingdom and France, and positive results across all markets drove comps.

These apart, the Zacks Rank #3 (Hold) company has been regularly rewarding its shareholders through share repurchases and dividends. Evidently, the company has a history of increasing dividend almost every year since the inception of its dividend payout policy in 1976. In September 2018, McDonald’s raised its dividend by 15%. Prior to that, it had increased the company’s quarterly dividend by 7.4%, 7%, 6%, 5%, 5%, 10% 15% and 11% in 2018, 2017, 2016, 2015, 2013, 2012, 2011 and 2010, respectively. In the last two years (2017 and 2018), McDonald’s had returned more than $16 billion via dividends and share repurchases.

 



Concerns

Revenue decline at McDonald’s has been weighing on its performance for quite some time. In the first quarter of 2019, the metric decreased 4% year over year, following a 3%, 7%, 12% and 9% decline in the fourth, third, second and first quarter of 2018, respectively. The top line had also decreased a respective 11.4%, 13%, 7% and 4.7%, in the fourth, third, second and the first quarter of 2017. This downturn reflects the impact of the company’s strategic refranchising initiatives. During the reported quarter, revenues at the company-operated restaurants decreased 12% year over year to $2,240.5 million.

Of late, McDonald’s margins have been under pressure due to wage increases worldwide. Furthermore, costs associated with brand positioning across all the key markets as well as ongoing investments in initiatives are likely to persistently dent margins, at least in the near term. Increased commodity costs are added concerns. In the first quarter, consolidated margins contracted 20 bps.

Stocks to Consider

Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Yum China Holdings, Inc. YUMC and Noodles & Company NDLS, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle Mexican Grill and Yum China’s long-term earnings are likely to witness 19.2% and 9.8% growth, respectively.

Noodles & Company has an impressive long-term earnings growth rate of 8.8%.

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