McDonald’s Corporation (MCD) has only just begun its turnaround, but already investors believe. Shares of this Zacks Rank #1 (Strong Buy) recently hit an all-time high.
Is it too late to get in?
McDonald’s is the iconic American burger chain. It operates over 36,000 restaurants around the world.
For the last few years, McDonald’s has struggled to grow its U.S. business and a public relations scandal in 2014 involving one of its food suppliers in China contributed to lower sales in that market as well.
But it put into place a turnaround strategy, that included serving breakfast all day in the United States, and the company saw improving numbers in the third quarter.
US Same Store Sales Turn the Corner in the Third Quarter
On Oct 22, McDonald’s reported its third quarter results and beat the Zacks Consensus Estimate by 10%. Earnings were $1.40 versus the consensus of $1.27.
But what analysts have been most worried about were the sales.
Global same-store-sales rose 4% boosted by Australia, the UK, Canada and positive numbers in Germany. In its emerging market business, China saw growth thanks to its value menu and breakfast.
McDonald’s said China saw a sales recovery after its rough 2014 due to issues with a supplier, which also impacted Yum and some other brands.
The big news in the quarter was the improvement in the United States. US same-store-sales rose 0.9%. It was the first increase in same-store-sales in the US in 2 years.
Its new Premium Buttermilk Crispy Chicken Deluxe sandwich and breakfast were the stars of the quarter.
Momentum Expected to Continue
The analysts are bullish that this positive momentum may continue into the fourth quarter and beyond, into 2016.
16 estimates were raised for 2016 in the last 60 days pushing up the Zacks Consensus Estimate to $5.35 from $5.13.
That is earnings growth of 9.3%, which is also moving in the right direction as the company has been plagued by falling earnings the last 2 years.
Billions Back to Shareholders
With many investors worried about the safety of their dividends given the commodities shake-up, investors in McDonald’s don’t have much to fret about.
The company is expected to pay out between $8 and $9 billion to shareholders this year in the form of share buybacks and dividends.
The dividend is pretty juicy, currently yielding 3.1%.
Shares Hit New All-Time Highs
With more sunny days seemingly on the horizon, investors have been diving into the shares.
This week, they hit new all-time highs. Here’s the 20-year chart.
You can see that the last move higher has been pretty dramatic.
But is the run done? Should investors still get in?
I’m not going to kid you. The shares aren’t cheap. McDonald’s is trading with a forward P/E of 23.9 but it doesn’t have the expected growth rate for 2016 to support that valuation.
But investors are betting on a bigger turnaround in earnings in 2017 and beyond and are willing to step in at the higher valuation.
For investors looking for a well-known big cap name that will benefit from the low price of gasoline, which also pays a stable dividend, then McDonald’s is one to keep on the short list.
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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.
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