McDonald's Corporation MCD is currently a well-performing restaurant stock. A rise in share price and strong fundamentals signal its bullish run.
Shares of the company have returned 44.1% in the past year, outperforming the industry’s gain of 20.8%.
The outperformance has been backed by upward revision in earnings estimates for 2018. This reflects analysts’ unwavering confidence in the stock. Over the past 60 days, consensus estimate for 2018 earnings rose 0.4%. The company also delivered positive earnings surprises in each of the trailing four quarters, the average beat being 5.21%.
Per our VGM Score, which identifies the most attractive value, growth and momentum characteristics, McDonald’s has a Growth Score of B. This reflects robust growth rate and potential of the stock.
Let us delve deeper into the other factors that make this stock a lucrative pick.
Sales Building Efforts to Drive Traffic Amid Competition
McDonald’s has always been focused on driving guest traffic. Toward this end, the company is emphasizing on operational excellence, product innovation, offering value menu and rolling out more limited period offers. In fact, the company’s endeavors have started bearing fruit and the third quarter of 2017 marked the third consecutive quarter of comparable guest count growth.
In addition, the company is undertaking digital initiatives to enhance customer experience, with nearly all of its U.S. restaurants now using digital menu boards. Meanwhile, to provide augmented convenience to customers, McDonald’s is increasingly focusing on delivery. In fact, it has already scaled this initiative by introducing delivery at more than 3,700 restaurants in the United States via its partnership with UberEATS.
McDonald’s believes that consistent menu innovation can lend it a competitive edge over the likes of Yum! Brands, Inc. YUM, Domino's Pizza, Inc. DPZ and Jack in the Box Inc. JACK. In line with this, the company started the year with the introduction of Dollar Menu.
Franchised Model Safeguards Earnings
Considering that 91% of the company’s system-wide restaurants are franchised and is expected to reach 95%, the company gain from reduced ownership. Although re-franchising weighs on near-term revenues as it replaces company-operated sales with franchised sales, over the long term, it will reduce the company’s capital requirements and drive earnings.
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 6.9%.
Refranchising Drives Net Margin
McDonald’s refranchising and stringent spending makes the company optimistic about achieving approximately $500 million of net annual savings on SG&A expenses by 2018. Further, it expects to trim another 5 to 10% from its remaining cost base by the end of 2019.
Despite high labor costs and expenses related with brand positioning and ongoing initiatives, the company has been able to achieve higher net margins. We note that McDonald’s trailing 12-month net margin is 24.2% as compared with the industry’s gain of 3.3%.
Regular Returns to Shareholders
McDonald’s has been regularly rewarding its shareholders through share repurchases and dividends. The company has a history of increasing dividend almost every year since the inception of its dividend payout policy in 1976. Last September, the company raised its dividend by 7.4%. Moreover, per its cash return target, the company returned $30.0 billion to shareholders over a three-year period from 2014 to 2016 via dividends and share repurchases. Meanwhile, the company expects to return between $22 billion and $24 billion to shareholders in the three-year period ending 2019.
We appreciate McDonald's’ efforts to consistently enhance shareholder returns despite the sluggish economic conditions in some of its major international markets. This reflects the company’s business strength and sustainability of cash flow.
McDonald’s carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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