McDonald’s Corporation (NYSE: MCD) has been in the news lately for all the right reasons, and its new turnaround plan to gain market share and stem consumer losses appears to be working.
$MCD is a turnaround stock that is up about 20% in the past couple of months.
At the start of the week, on October 19, 2015, McDonald’s shares were trading at $104.81 but spiked after a strong earnings report. As of market close on October 23, 2015, McDonald’s shares were trading at $112.59, up about 7% since Monday and up about 20% year-to-date. McDonald’s has a high price target of $130, representing potential upside of about 15%.
The company typically increases its quarterly dividend in the fourth quarter, with gains of $0.04 in each of the last two years, and boasts 38 years of consecutive annual increases. McDonald’s currently has an annualized dividend of $3.40 per share and a dividend yield of 3.24%.
More Growth to Come?
Here’s why McDonald’s is on a strong growth path with more upside to come.
Former CEO Don Thompson retired on March 1, 2015, and was succeeded by Steve Easterbrook. Easterbrook previously served as Senior EVP and Chief Brand Officer, as well as President of McDonald’s Europe. He played an integral part in expanding McDonald’s global footprint. Easterbrook’s first initiatives as CEO was to develop a new strategic business plan to turnaround the company’s fortunes. The plan included improving the supply chain, simplifying the food menu, adding healthier menu items to meet changing customer needs, and shortening customer wait times – to help drive earnings growth. Easterbrook hired Robert Gibbs as Global Chief Communications Officer and Silvia Lagnado as Global Chief Marketing Officer to help implement the turnaround plan on a global level. On June 1, 2015, Easterbrook changed the company’s operating divisions from the US, Europe, Asia-Pacific, APMEA and Other Countries & Corporate to the US, International Lead Markets, High Growth Markets and Foundational Markets & Corporate.
Well-Received 3rd Quarter EPS
On October 22, 2015, McDonald’s reported third quarter earnings for the three months ended September 30, 2015. For 3Q15, the company had total revenues of $6.62 billion, up about 2% from $6.50 billion in 2Q15. A quarter-to-quarter 1% decrease in total operating costs and expenses helped operating income grow from $1.85 billion in 2Q15 to $2.05 billion in 3Q15. McDonald’s reported net income of $1.31 billion and earnings of $1.40 per share, a robust improvement over net income of $1.2 billion and earnings of $1.25 per share in the second quarter.
Crushed Analysts’ Projections
McDonald’s crushed analyst estimates of $6.43 billion in revenue and $1.28 in earnings per share. The key reason behind this success was a 0.9% increase in comparable store sales in the United States where analyst had projected a 0.2% decline. This was the first time since 2013 that the company reported an increase in US comparable store sales, and is an early indicator that the turnaround plan appears to be working and consumers like the changes they see. Management largely attributes this to a revamped menu, better ingredients and healthier cooking processes.
In 3Q15, the company introduced the Premium Buttermilk Crispy Chicken Deluxe, an upgrade to the normal Crispy Chicken served in sandwiches, wraps and salads, after successful testing in June 2015. McDonald’s also implemented several changes to ingredients such as switching from margarine to butter in its Egg McMuffin sandwich and switching from 4 ounce to 4.25 ounce raw beef patties in its Quarter-Pounder hamburger. Additionally, the company now toasts its buns 15 seconds longer which increases warmth by 15 degrees when delivered to customers.
Management continues to look for new ideas to help increase traffic and grow revenues. CEO Easterbrook noted shorter wait times inside stores and improved consistency and accuracy in the drive-thru that boosted repeat customers. In certain states, franchised stores have the option to introduce local specialties to their menu to better reflect the communities they are located in. McDonald’s does this internationally such as its vegetarian McPaneer Royale in India, the Pork Samurai Burger in Singapore and the Deluxe Shrimp Burger in Korea.
The company is testing a new value platform called “Pick 2” which allows customers to mix and match any 2 items from a set of 6, for just $2 – this is an upgrade over the company’s Dollar Menu and offers more choice, and healthier eating options. The company is testing mozzarella sticks with marinara sauce and sweet potato fries in smaller markets like Florida, Texas and Wisconsin that may be included in the nationwide rollout of Pick 2 if customers respond positively after a 5-week trial. Stores in the United Kingdom already serve mozzarella sticks and stores in Australia already serve sweet potato fries. In a study by Chicago-based research and survey group 8Sages, approximately 32% of respondents said they would dine in more often with the introduction of a new value menu.
US comparable store sales provide insights on trends and future earnings because this is the most stable of all divisions. International divisions are highly segmented based on region and are susceptible to local currency fluctuations on dollar appreciation which can negatively dollar-denominated impact earnings. In FY2014, the US division accounted for 40% of total operating income, and for 50% of total operating income for the first nine months of FY2015. The increase in US comparable store sales is also a positive note for franchisees that account for 80% of the operating income in the US division. CEO Easterbrook has also successfully rebuilt the company’s relations with its franchise owners.
Analysts expect McDonald’s success to continue into 4Q15 as revenues benefit from the newly launched all-day breakfast menu, which started on October 6, 2015, and more order customization for customers. In addition to comparable store sales growth in the US, McDonald’s reported 4% growth in total global comparable store sales. The High Growth Market segment had an increase of 8.9% with strong growth in China, a country where McDonald’s is trying to rebuild customer trust after costly food safety issues in 2014. McDonald’s 4Q15 is expected to be big for shareholders as the company continues its turnaround plan and returns more value to shareholders through share price appreciation and dividends.