Just a couple of years ago, I thought McDonald’s Corporation (NYSE:MCD) was in serious trouble. It wasn’t that MCD stock was going to zero, or anything close. It just had become a moribund and obsolete relic of the fast food sector. The reason was that management was afraid to mess with success.
At that time, the new MCD stock CEO had spent his entire career inside McDonald’s, finally got the top job, and was facing new and unexpected challenges. These challenges came both from competition that was reenvisioning their strategy and from the fast and fast-casual market itself. I think he was too worried about upsetting the apple cart. Who wants to be the guy who is a McDonald’s lifer and kills the golden goose by taking too many risks?
Well, that CEO was removed and replaced with Steve Easterbrook, who came over from the international marketing side. He wasn’t afraid to take risks, and they are paying off.
Third quarter numbers for McDonald’s stock are pretty darn impressive. Let me start by mentioning the global 6.0% comparable-store sales. This is huge. As I’ve said many times, any retail business is happy with 3-4% comps. For MCD stock, after all these years, to grow comps by 6% — globally, no less — is astounding.
Breaking this down, we see a 4.1% increase in U.S. comps. This was driven by those same risks that Easterbrook took, if you can call them risks. Using national beverage and McPick 2 value promotions, along with the new “Signature Crafted Premium Sandwich” idea, MCD boosted those domestic comps.
This idea of a signature crafted premium sandwich is really no different than the strategies that most burger chains have taken over the years. It’s just a fancy, dressed-up sandwich with a cool name. McDonald’s was just too afraid to do what everyone else had been doing for years.
The U.K. and Canada business generated 5.7% increases in comps, and that sent operating income for that segment soaring 21%.
So how did McDonald’s stock get to 6% comps, globally? Some territory must have delivered blockbuster numbers. One territory did, primarily in what the company calls “Foundational Markets,” where comps rose 10.2%. This market is described by MCD as:
- Largest and most diverse geographical segment spanning over 80 markets across parts of Asia, Europe, Middle East & Africa and Latin America
- Potential to operate under a largely franchised model
- Contains almost all DL markets globally
- Home to about 60% of the world’s population and represents about one third of global GDP growth
Meanwhile, its High Growth markets, which consist of China, Korea, Russia, Poland, Italy, Spain, Switzerland, and the Netherlands, contributed 6.2% comps.
All around, these are great comps, and with it comes fine cash flow. That means the MCD dividend is quite safe.
This resulted in a systemwide revenue increase of 7% and operating income increase of 5% (3% in constant currencies). This all flowed to the bottom line, boosting EPS by 9% (7% in constant currencies). That 9% number puts MCD stock firmly in Peter Lynch “stalwart” territory.
McDonald’s is also revving up two vital initiatives. The first is integrating technology, which it calls “velocity accelerators.” In other words, this is the tech equivalent of what the drive-through did for volume. Mobile order and pay will be in 20,000 of its 37,000 stores by year-end, and 10,000 restaurants should have delivery available.
McDonald’s also aims to totally re-franchise in China and Hong Kong. The entire store base is now 91% franchised, just 2% short of management’s goal for next year.
Bottom Line on MCD Stock
I think MCD stock is a bit pricey, trading at about 25x TTM net income. However, if you plan to hold for the very long term, you could buy it here. I might be more tempted to wait for a correction of 10-15%. Should McDonald’s earnings slip up just once, we might see exactly that.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
