The fast food landscape is much more crowded than it was 10, 20 or 30 years ago, when McDonald’s (MCD) was pretty much without peer.
It’s still on top today, but compared to newer, hipper chains like Five Guys, Shake Shack and Chipotle (CMG) — not to mention strong improvements from the likes of Wendy’s (WEN) and Yum! Brands (YUM) — McDonald’s feels a bit like a dinosaur.
Now it’s finally making changes to keep from becoming extinct. And Wall Street seems intrigued.
After decades of little more than cosmetic changes, it seems McDonald’s is in the early stages of a major facelift, most likely in response to weakening sales in recent years. It may be a coincidence, but so far those changes have come in tandem with improved sales, and a resurgence in McDonald’s stock.
In fact, MCD is up 19% in the past three months alone.
The latest change at McDonald’s is being tested in California: According to the Los Angeles Business Journal, the fast-food behemoth will provide table service — with employees serving customers at their seats — at 600 locations throughout southern California.
The table service idea comes on the heels of several other bold moves by MCD, including:
- The introduction of all-day breakfast nationwide.
- A new “TasteCrafted” menu that includes a variety of bun options for its signature burgers and chicken sandwiches.
- Plans to switch to cage-free eggs.
- And other new menu items including burgers with thicker patties and a 48-piece Chicken McNugget bucket offering in Japan, featuring Japanese pop stars on the buckets.
MCD Changing With the Times
With the rise of more exciting burger chains such as Five Guys and Shake Shack (SHAK), McDonald’s has been losing customers in recent years. Revenues have slipped in each of the last five quarters, and earnings per share are on the cusp of a second consecutive year of negative growth.
Some positive signs emerged last quarter, however. Same-store sales jumped for the first time in more than two years, and earnings per share rose 22.5%. Plus, EPS growth is expected to start taking off next year, with analysts anticipating a 9% improvement in per-share profits from MCD.
Meanwhile, McDonald’s stock has been on a tear, up 25% since the market bottom on August 25. At $114, MCD is suddenly at an all-time high.
Whether MCD stock can keep it up will depend on if the sales turnaround and projected EPS improvements are for real. But on Wall Street, image matters, especially when accompanied by strong numbers. And when a company as high-profile and historically dominant as McDonald’s finally shows it’s willing to change with the times — especially after the brand had started to show signs of growing stale — it grabs investors’ attention.
Thus, as I wrote last week, MCD stock is still a buy even at its current all-time high. Institutional ownership is up from 64.7% to 68.7% since the beginning of the year, the stock has been inching its way up since breaking through its four-year ceiling of $103 in October, and it trades at a fairly reasonable 21 times 2016 earnings estimates.
And don’t forget that MCD remains a dividend stalwart, having just upped its quarterly payout for a 39th straight year. The 3.1% yield is a nice buffer against future declines, and is much better than the 2% yield you’re going to find in your average large-cap stock.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
