McDonald’s (MCD) stock seems poised for a turnaround, as several of its catalysts that lay dormant are finally kicking in, but the market failed to priced these accurately into MCD stock. In this currently volatile market, however, McDonald’s 3.3% yield makes it look all the more attractive, and investors could do worse than take a ride in MCD’s “PlayPlace” at these levels.
Credit Suisse recently upgraded McDonald’s stock to “outperform” from “neutral,” believing the company’s same-store sales are “starting to turn.” The firm raised its price target on MCD to $112 from $100, contending that the turnaround isn’t reflected in the stock. But since then, MCD stock shot up to a 9% gain for the year.
Credit Suisse’s note indicates that key changes made by McDonald’s this year are starting to bear fruit. Two of the most important changes made by the company involves making its hamburgers juicier and more flavorful, thereby emulating the success of fast growing chains like Five Guys whose hamburgers have been much more popular with consumers than those of McDonald’s.
Notably, the fast food giant has also looked to make its menu more natural, launching and advertising a buttermilk crispy chicken sandwich that it says is made with “100% chicken breast meat, real buttermilk and no artificial colors,” and replacing the margarine that it previously used on its breakfast sandwiches with butter. Of course, millennials are attracted to restaurants that offer natural ingredients.
MCD is set to implement more changes that should boost its sales further. Mcdonald’s already launched its all-day breakfast, which should appeal to the many consumers who crave Egg McMuffins when they should be eating filet mignon, or whatever it is responsible adults eat. And if you sleep in on the weekends, all-day breakfast is right up your alley.
And seeking to tap into consumers’ growing hunger for more exotic, less traditional food, the fast food behemoth is rapidly expanding its Create-Your-Taste initiative, which allows customers to make their own burgers by picking from “dozens of ingredients and hundreds of combinations.” Using Create-your-Taste, consumers can, for example, choose to have their burger on a low-carb, gluten-free lettuce wrap and add trendy toppings such as guacamole and sriracha mayo.
Meanwhile, MCD is showing signs of recovering from its food scandal in China. The company’s comparative sales in the country dropped 3% in its second quarter vs. the same period a year earlier; but sales in the country’s top five cities, which account for 50% of McDonald’s sales in China, were unchanged year-over-year.
As the memory of the food scandal recedes in China, results should continue to improve there. Moreover, the stimulus package that Beijing is rumored to be putting together could boost McDonald’s China results going forward.
Given the apparent turnaround in MCD’s performance which is probably not reflected in McDonald’s stock, and the company’s upcoming positive catalysts, investors should buy the shares.
Of course, in light of today’s whacky macro environment, McDonald’s dividend makes the stock even tastier.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.