MCD Getting Back to Basics is Good For McDonald’s Stock

As a value investor, I often find stocks that appear to be damaged goods. Cheap stocks have lots of dings on them, but the question is, how serious are these problems?

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A good example is one of our new additions to the Buy List this year: McDonald’s (MCD). Their business has not performed well and they’ve made a lot of errors; however, they’re beginning to move in a different direction.

Venessa Wong describes some of the new strategies MCD is undertaking:

You could say 2013 was a year of experimentation for McDonald’s: Fish McBites came out in February, McWraps in March, and Mighty Wings in September—all relative novelty items for the fast-food giant. All that innovation amounted to a 0.2 percent drop in U.S. same-store sales over the year. Maybe that’s why for its first permanent addition to the menu in 2014, McDonald’s is sticking to basics: a new burger.

The Bacon Clubhouse, available in beef or chicken this week, is the chain’s first burger besides the Big Mac to be topped with special sauce. It comes with leaf lettuce—not the shredded stuff—and a thick slice of tomato. Taking a cue from Wendy’s (WEN) fancy bread strategy, the Clubhouse is served on an “artisan roll.” A reviewer on called it “the most satisfying burger I’ve ever had from McDonald’s.”

The company recently slowed product launches as it works on improving operations and service. “We acknowledged last year that we probably did things a little bit too quickly in terms of the Egg White Delight and then the McWraps and then the Quarter Pounders with the various toppings,” McDonald’s Chief Financial Officer Peter Bensen said at a conference on Tuesday, “and that was a big stress to the restaurants.”

As part of its turnaround, McDonald’s plans to “refocus on the core,” Bensen added—meaning favorites like the Big Mac, Quarter Pounder, French fries, Chicken McNuggets—as well as breakfast. Any new items introduced this year will be easier to prepare with the chain’s new kitchen equipment. McDonald’s spokeswoman Tyler Litchenberger says the Bacon Clubhouse Burger will be a “core menu item.”

The new sandwich shouldn’t be too unfamiliar for McDonald’s kitchen workers. Burger Business describes it as basically a Clubhouse Angus—a sandwich the chain tested in 2012—with a quarter-pound patty, lettuce, tomato, and a new bun. The emphasis on sandwiches was also a prominent theme in the new Dollar Menu and More launched in November, which includes new items like the BBQ Ranch Burger, Buffalo Ranch McChicken, Bacon McDouble, Bacon Cheddar McChicken, and Bacon Buffalo Ranch McChicken.

McDonald’s 2014 menu pipeline “is designed to introduce new products and limited-time offers at the right pace and price points,” Bensen said. Executives are certainly hoping a milder form of menu innovation will go down easier than last year’s bold experiments.

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