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McDonald's Stock Up 13% in 6 Months: Can It Gain Further?

Zacks Equity Research

McDonald's Corporation MCD is riding high on impressive earnings surprise history, various sales and digital initiatives as well as positive comparable sales. Evidently, the stock has gained 13.3% in the past six months, outperforming the industry’s collective increase of 8.3%. However, high labor costs and currency headwinds remain major concerns. Let’s delve deeper.

Key Catalysts

McDonald's sales boosting initiatives are providing a boost to global comparable sales (comps). In third-quarter 2018, comps grew 4.2%, marking its 13th straight quarter of positive comps. Also, U.S comps were up 2.4% in the same period.

In order to drive comps 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.

 

Meanwhile, this Zacks Rank #3 (Hold) company’s strategic efforts in the International Lead segment and High Growth markets continue to drive comps higher. In third-quarter 2018, the International Lead segment and High Growth markets witnessed comps growth of 5.4% and 4.6%, respectively. Comps growth in international markets was driven by robust sales in the United Kingdom, Australia and France. In High Growth markets, comps growth can be attributed to strong performance in Italy and the Netherlands as well as positive results across majority of its segments.

Moreover, McDonald’s is consistently trying to improve its performance in the International Lead Markets including Australia, Canada, France, Germany and the UK.

Increasing guest counts remain the company’s top priority and it intends to regain customers by focusing on food quality, convenience and value. McDonald’s expects its velocity accelerators of Experience of the Future, digital and delivery to boost growth over the long term. Given various initiatives undertaken to drive growth, we believe that the stock has a decent upside potential.

Concerns

McDonald’s revenues have been weighing on the company’s performance for quite some time. In the third quarter of 2018, the company’s revenues declined 7% year over year, following a 12% and 9% fall in the second and third quarter of 2018, respectively. Further, the top line had declined 11.4%, 13%, 7% and 4.7% in the fourth, third, second and the first quarter of 2017, respectively. This downturn reflects the impact of the company’s strategic refranchising initiatives.

Also, McDonald’s margins have been under pressure from worldwide wage increases lately. Apart from minimum wage increases, additional health care costs related to ‘Obamacare’ in the United States are resulting in high labor costs. Costs associated with brand positioning in all the key markets as well as ongoing investments in initiatives would too continue to weigh on margins, at least in the near term. Increased commodity costs might further dent margins. In the third quarter, consolidated company operated margins contracted 70 bps to 18.4% due to continued labor as well as commodity pressures across the major markets.

Key Picks

Better-ranked stocks worth considering in the same space include Bojangles', Inc. BOJA, The Habit Restaurants, Inc. HABT and BJ's Restaurants, Inc. BJRI. While Bojangles' and Habit Restaurants sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bojangles', Habit Restaurants and BJ's Restaurants has an impressive long-term earnings growth rate of 12.5%, 20% and 14.5%, respectively.

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