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McDonald’s Hits a 52-Week High: What’s Driving the Stock?

Zacks

Shares of McDonald’s Corporation MCD hit a 52-week high of $156.56 on Jul 7. However, the burger giant closed the day’s trading a trifle lower at $156.27.

Notably, McDonald’s shares have vastly outperformed the Zacks categorized Retail-Restaurants industry in the last one year. While the stock rallied 28.1%, the industry gained only 9.1% in the same time period.



Moreover, positive estimate revisions reflect optimism in the company’s potential as earnings growth is often an indication of strong prospects (and stock price gains) ahead. Although the current quarter consensus trend has remained constant over the last two months, the current year estimate has inched up 0.6%. Thus, McDonald’s is now expected to post earnings of $6.40 for the full year, which reflects an increase of 12.3% year over year.

We note that the company has consistently beaten estimates in each of the trailing 11 quarters, delivering an average positive surprise of 7.01% in the last four quarters.

Notably, the market remains upbeat about McDonald’s constant returns to shareholders in the form of repurchases and dividends. The company also has a track record of increasing dividend almost every year since the inception of its dividend payout policy in 1976. Further, the company expects to return between $22 and $24 billion to shareholders for the three-year period, ending 2019.

Meanwhile, a shift to a greater percentage of franchised restaurants forms a part of the company’s efforts to streamline its business and focus on the quality of its offerings. Refranchising is likely to have an upside impact on its earnings and margins as the company is expected to gain from trimming its overall cost of operations and preserving its capital.

Going forward, growing guest counts remains the company’s top priority as it focuses on food quality, convenience and value. In this regard, the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings.

Moreover, in order to provide augmented convenience to customers, McDonald’s is undertaking digital initiatives and focusing on delivery. At the same time, the company is accelerating Experience of the Future (EOTF) deployment in the U.S., building on its success in markets around the world.

However, higher labor costs along with currency headwinds are likely to keep the company’s profits under pressure. Also, political and economic unrest in some parts of the world and challenging environment in the U.S. restaurant space might restrict revenue growth.

Zacks Rank and Other Key Picks

McDonald’s currently holds a Zacks Rank #2 (Buy). Some other top-ranked restaurant stocks include Dave & Buster’s Entertainment, Inc. PLAY, Red Robin Gourmet Burgers, Inc. RRGB and Diversified Restaurant Holdings, Inc. SAUC. All these three stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, Dave & Buster’s, Red Robin and Diversified Restaurant Holdings pulled off an average positive earnings surprise of 30.50%, 17.27% and 45.83%, respectively.

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