McDonald's (MCD) Strategic Plans Bode Well: Should You Hold?

McDonald's Corporation (NYSE:MCD) consistent efforts to improve sales and digital initiatives, increased focus on delivery and accelerated deployment of Experience of the Future restaurants in the United States are likely to boost its performance.

In 2017, the company’s stock has gained 8.6% compared with the industry’s increase of 1.7%. However, dwindling top line and higher labor costs might dent its performance. Let’s delve deeper.

Hidden Catalysts

McDonald’s reported better-than-expected earnings for the 15th straight quarter, when it posted first-quarter 2018 results. Moreover, in the trailing four quarters, the company’s earnings have surpassed the Zacks Consensus Estimate by an average of 5.5%. Robust operating performance drove McDonald’s earnings during the first quarter.

Further, the company’s sales boosting initiatives are resulting in increased global comparable sales (comps). In first-quarter 2018, comps grew 5.5% and marked its 11th straight quarter of positive comps. Also, guest counts rose by 0.8%. Notably, the first quarter marked McDonald’s fifth straight quarter, wherein the company’s global guest counts improved on a year-over-year basis. Moreover, U.S comps were up 2.9% in the same period.

We are impressed with this Zacks Rank #3 (Hold) company’s digital initiatives to better serve customers, with nearly all of its U.S. restaurants using digital menu boards. Additionally, McDonald’s continues to roll out mobile order and pay with a new curbside check-in option. Currently, it has launched the option in nearly all 20,000 U.S. restaurants. The company is increasingly focusing on delivery for customers' benefit as well.

In fact, McDonald’s is the world’s largest chain of fast-food restaurants, with presence in more than 100 countries. Its offerings have reached the billion-dollar brand status through sustained product innovation and geographic expansion. With an almost 10% share of the global informal-eating-out market, there is ample scope for the company to grow in the future as it boasts a scale advantage compared with its peers.

Moreover, increasing guest counts remains the company’s top priority. McDonald’s also intends to regain customers by focusing on food quality, convenience and value.

Concerns

McDonald’s revenues have been declining for quite some time. In the first quarter, the metric decreased 9% year over year, following a respective decline of 11.4%, 13%, 7% and 4.7% in the fourth, third, second and first quarter of 2017. The downturn reflects the impact of the company’s strategic refranchising initiative. Also, revenues at company-operated restaurants were down 26% year over year to $2,535.6 million. However, the same at franchise-operated restaurants increased 15% to $2,603.3 million.

Further, higher labor costs might keep the company’s margins under pressure. In the first quarter, consolidated margins contracted 150 bps to 16% due to China/Hong Kong transaction in 2017 and wage increase. Moreover, with about 40% of McDonald’s operating income coming from the international lead segment and over 10% from the high-growth markets, its earnings remain vulnerable to negative currency translation.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. (NASDAQ:WING) , Dine Brands Global, Inc. (NYSE:DIN) and Denny's Corporation (NASDAQ:DENN) . While Wingstop sports a Zacks Rank #1 (Strong Buy), Dine Brands and Denny's carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

Denny's has reported better-than-expected earnings in the preceding two quarters.

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