Iconic fast food chain McDonald’s Corp. (MCD - Free Report) has been a staple in the restaurant industry soon after its founding in 1955. By concentrating on a limited menu—burgers, fries, and beverages—and focusing on quality and effectiveness, the company managed to sell its 100 millionth hamburger just three years later in 1958.
From there, The Golden Arches expanded to 119 countries around the world. The menu, however, has gotten much more complex, and varies depending on location and region. Plus, we can all agree that the McDonald’s breakfast menu, and its decision to make that an all-day option, was one of their all-time best business decisions, ever (#BlessTheMcGriddle).
The company is in the middle of a significant turnaround effort, and the Zacks #1 (Strong Buy) stock has experienced a strong rally since 2015. As its valuation has risen, investors and analysts have come to expect certain results from McDonald’s, which is why its most recent quarter came as a little bit of a shock.
Mixed Fourth Quarter Results
For any other restaurant company, these results would have been stellar. But for McDonald’s, they were not reflective of the company’s previous performance.
Adjusted earnings of $1.71 were strong, surpassing the Zacks Consensus and improving 19% year-over-year.
Sales, though, was where MCD struggled, and saw a decline due to its overall strategic refranchising initiative. Revenues at company-operated restaurants fell 26.8%, though revenues at franchise-operated restaurants increased 12.2%.
Global comps grew 5.5%, while U.S. comparable sales and international lead markets increased 4.5% and 6%, respectively.
Shares of McDonald’s experienced their biggest intraday drop after the report was released, and even though it matched Street estimates for U.S. comps, analysts have become so used to seeing the company exceed in this category that this slowdown was certainly a surprise.
Earnings growth estimates have been steadily increasing, however, and analysts are still quite bullish on MCD.
For its current quarter, earnings are expected to grow almost 9%, and five analysts revised their estimates upwards in the last 30 days compared to none lower.
Fiscal 2018 figures are also looking quite promising, with eight estimates moving higher in the past month. The consensus estimate trend has seen a boost for this time frame, increasing from $6.97 per share to $7.26 per share.
Earnings estimates for 2019 are on the rise as well, jumping from $7.48 per share to $7.81 per share in the last 30 days.
Can the Rally Continue?
Despite its fourth-quarter hiccup, we have to remember that MCD stock has been on a very strong run these past couple of years, growing nearly 40% over the past one year and gaining almost 80% in the past five years.
MCD is now trading with a forward P/E of 23.77.
Overall, McDonald’s performance stands out compared to other U.S. restaurants who have struggled with sales and traffic growth, thanks to a variety of factors such as meal-kit companies like Blue Apron (APRN - Free Report) and the rise of delivery services and apps like Grubhub (GRUB - Free Report) and Postmates.
McDonald’s has been good at both adapting to the changing restaurant industry—think of the increasing number of locations where it offers UberEats delivery—and rolling out new menu promotions, like its recently revamped Dollar Menu; this program is already showing signs of success with customers.
Change and revitalization does not come with out cost, and the company is planning a $2.4 billion capital spending program for this year.
There’s no doubt McDonald’s has a lot of work to do, but it’s been doing a lot of work for years now, as evidenced by its valuation and strong price performance. Because of the company’s commitment to modernizing its brand in many different ways, MCD looks to be an intriguing opportunity for investors.
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