Everyone loves a turnaround story and McDonald’s Corporation (MCD) stock is a prime example of one. Shares of McDonald’s have gained nearly 10% since the start of 2016 and more than 35% over the past year.
By comparison, MCD stock has flirted with the $100 per-share mark on various occasions beginning in early 2012 before it finally breached the key level in late 2015. It’s remained a triple-digit stock ever since.
The reason for the surge in MCD stock? Consumers are returning to McDonald’s and it is showing in their stock.
In the most recent quarter, the company said that its global same-store sales rose by 6.2%, while earnings per share rose 46% year-over-year to $1.23.
The question MCD stock holders need to be asking themselves is if the turnaround is in full force and showing no signs of slowing down, why is the company toying around with new menu innovations?
McDonald’s is testing a new specialty french fries offering at four locations in San Francisco, called garlic fries. If successful, the product will be made available to around 250 stores throughout the San Francisco Bay area.
Meanwhile, McDonald’s is testing smaller and larger size Big Macs in both Texas and Ohio restaurants.
MCD Stock: Two Schools of Thought
There are two possible reasons to explain why McDonald’s is suddenly testing new menu innovations at a time when business is doing just fine.
First, McDonald’s is in full-court press mode and looking to turn its strong momentum into an unstoppable beast within the restaurant sector. Or McDonald’s management knows something that it is trying to keep a secret — its momentum is dying off.
McDonald’s management said during its most recent conference call that its All-Day Breakfast menu offering “remains a significant contributor to top-line results.”
This comment should be concerning to investors, as Wall Street’s analysts are starting to open up to the possibility that the concept of All-Day Breakfast is dying off. According to Longbow’s Alton Stump, “customer excitement and trial usage related to the All Day Breakfast launch waned.”
The analyst added that “share pressure from the All Day Breakfast launch by McDonald’s lessened for Burger King sequentially.”
If Stump is correct and McDonald’s is seeing its “significant contributor” of top-line growth dying off, the company needs to find new avenues of growth — and quickly.
Wall Street’s love affair with MCD stock won’t last long unless the company continues to wow investors.
Will garlic fries prove to be a new source of top-line growth for McDonald’s? Maybe. Maybe not. However, between two choices of sitting around and waiting to find out or cashing in McDonald’s stock near historical highs, the latter seems like the better alternative.
Assuming that McDonald’s will see its momentum continue indefinitely, the question of investment suitability should switch to a question of valuation.
McDonald’s stock is currently trading at a 23 times its estimated 2016 earnings — significantly ahead of its five-year average of around 17.
Naturally, McDonald’s stock deserves to trade at a premium to its five-year average, but another key question for investors is how much of the turnaround story is already priced into shares.
Bottom Line on McDonald’s
McDonald’s has made recent efforts to improve consumer perception related to the healthiness of its food products. Is a plate full of french fries smothered with garlic, olive oil, parmesan cheese, parsley and salt a menu offering that resonates with the image it wants to uphold? Certainly an even bigger Big Mac is not consistent with its message of health.
Bottom line, investors that bought into McDonald’s growth story a year ago are being rewarded with a superior return.
But for those unfortunate investors who have been sitting on the sideline waiting for a buying opportunity, the time is too late.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.