Here’s an interesting little factoid. In 2017, McDonald’s Corporation (NYSE:MCD) and MCD stock managed to pull off its best annual performance of the last decade. The stock was up 45% on the year, more than double the S&P 500.
As McDonald’s closed out the final quarter of 2017 with a respectable 7% gain, it seemed all but sure to cross the $200 threshold in 2018.
Now, more than halfway through January, MCD stock is struggling to keep up with both the index and its restaurant peers. If it wants to keep the momentum going, it’s going to need to do these three things well in 2018.
The Value Meal
Taking a page out of the discount store model, McDonald’s is relaunching its Dollar Menu with price points of $1, $2 and $3 to capture a bigger slice of the budget-conscious crowd.
McDonald’s says it’s missed out on something like 500 million transactions over the past five years as a result of not marketing its value offerings correctly.
It’s got an opportunity with the “$1 $2 $3 Dollar Menu” in 2018 to regain some of those transactions that went to competitors. As food deflation subsides, McDonald’s could be delivering the right offer at the right time.
Keep an eye on what CEO Steve Easterbrook has to say about it in the next couple of quarterly reports.
Bloomberg’s Sarah Halzack recently made an interesting observation about food delivery and how it could help McDonald’s grow its dinner and late-night business which currently only accounts for 30% of its total revenue.
“As McDonald’s gets more serious about delivery, including a joint venture with Uber Eats, it may get a second look from customers who wouldn’t typically think of it as a dinner or late-night snack option,” wrote Halzack on Jan. 8.
She’s bang on.
I used to have a McDonald’s literally 200 yards from where I live in Toronto. Unfortunately, it got torn down to make way for a subway station. As a result, we now go to a more expensive burger alternative down the street. If McDonald’s delivered, we’d order from the next-nearest location, mainly to get the all-day breakfast for dinner.
That to me is a no-brainer.
The only difficulty is that the Uber Eats delivery fee would be almost as much as the value meal, somewhat defeating the purpose.
That said, I think there’s enough of a market for people like me, who occasionally want a bite out of the Golden Arches.
It’s hard to believe that McDonald’s could push gross margins and operating margins any higher — they’re already higher than they’ve been in the last decade — but with some of the initiatives it’s introducing, it’s got a chance.
Between the revised Dollar Menu, a vegan burger in Scandinavia (I’m a vegetarian but eat vegan), fresh beef burgers, improved technology in its restaurants, not to mention its ongoing refranchising efforts, it’s entirely possible that McDonald’s profits will be even higher in 2018.
That would be great news for owners of MCD stock.
Bottom Line on MCD Stock
Of the three things I’ve mentioned that McDonald’s has to do well in 2018 to hit $200, the value meal’s success or failure is the one I believe investors will most focus on in the months ahead.
McDonald’s wants to get these budget-conscious customers back. If it can’t, that puts a limit on how much growth it will see here in the U.S., its largest market, which contributed 34% of its overall revenue in the first nine months of fiscal 2017 and 41% of operating income.
Until I see information that tells me the McDonald’s growth story is over, I’d be a buyer of MCD stock despite the fact it’s trading within a couple of dollars of its all-time high.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.