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McDonald's: Buy on Strategic Initiatives & Turnaround Plan


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On Sep 27, burger giant McDonald's Corp. (MCD - Analyst Report) was upgraded to a Zacks Rank #2 (Buy).

We note that last May, Steve Easterbrook declared a turnaround plan related to restructuring of the company’s worldwide operations and certain other financial updates. Since the announcement of this plan, the company has been engaged in a series of buyouts and layoffs in order to streamline operations and increase efficiency.

In fact, the company efforts to trim costs, simplifying menus, offering value meals and rolling out all-day breakfast in the U.S., has aided it in picking itself up in the domestic market.

Backed by these initiatives, in second-quarter 2016, the company succeeded in posting positive comps for the fourth consecutive quarter in U.S., after posting negative comps for two successive years.

MCDONALDS CORP Price and Consensus



Moreover, in keeping with its efforts to transform itself in a contemporary burger company, McDonald's has decided to relocate its headquarters to downtown Chicago by the spring of 2018. Notably, the company is currently based in the Chicago suburb of Oak Brook, IL.

At a time when the company is focusing on overhauling its operational structure we believe the shift of headquarters to an urban locale should bode well.

Meanwhile, the company enjoys moderate growth prospects through its exposure in the under-penetrated international markets.

Also, transition to a franchise-based business model should reduce the company’s capital requirements and facilitate earnings per share growth and ROE expansion, over the long term. In fact, owing to re-franchising and stringent spending, the company expects to achieve approximately $500 million of net annual savings on SG&A expenses by 2018, a majority of which is likely to be achieved by the end of 2017.

Nonetheless, soft industry growth remains a cause of concern. Moreover, higher labor costs, along with currency headwinds are likely to keep profits under pressure. Further, political and economic turmoil in various parts of the world might limit revenue growth.

Other Stocks to Consider

Other stocks in this sector worth considering include Denny's Corporation (DENN - Snapshot Report) , Wingstop Inc. (WING - Snapshot Report) and Papa John's International Inc. (PZZA - Analyst Report) . All the three stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Denny's 2016 earnings moved up nearly 2% over the last 60 days. Further, for full-year 2016, EPS is expected to grow a solid 20.2%.

The Zacks Consensus Estimate for Papa John's 2016 earnings climbed 1.7% over the last 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 7.81%.

Wingstop’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 15.46%. Further, for full-year 2016, EPS is expected to grow 17.6%.

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