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Can McDonald’s (MCD) Stock Maintain its Stellar Show in ’18?


McDonald's Corporation MCD exhibited outstanding price performance in 2017. In the last year, the stock has returned a whopping 45.1% compared with the industry’s gain of 20.8%.

Given its increased focus on delivery, enhancement of digital capabilities, and accelerated deployment of Experience of the Future restaurants in the United States, we believe that the stock has decent upside potential.

Let’s see what the New Year holds in store for McDonald's.

Sales Efforts for its Largest Market

In order to boost comps in the United States that represents about 40% of the company’s business, McDonald’s aims to increase its focus on growing guest traffic. In this regard, the company is focusing on operational excellence, product innovation; offering a value menu and rolling out more limited-time offerings. The company’s endeavors are boosting comparable guest count growth and the trend is expected to continue in 2018.

Particularly, the popularity of the company’s national value platform – McPick 2 – is likely to continue, aiding top-line growth this year. Also, McDonald’s is leaving no stone unturned to revitalize its McCafe brand. In this regard, the company is focusing on new cafe-quality espresso beverages, extended retail offerings and a branding overhaul to gain ground in the battle for the nation's coffee drinkers.

In addition, the company is undertaking digital initiatives to better serve customers, with nearly all its U.S. restaurants now using digital menu boards. Also, McDonald’s continues to roll out mobile order and pay with a new curbside check-in option.

Meanwhile, to provide augmented convenience to customers, McDonald’s is increasingly focusing on delivery. In fact, it has already scaled this initiative by introducing delivery at more than 3,700 restaurants in the United States via its partnership with UberEATS. This number is expected to increase significantly in 2018.

At the same time, the company is accelerating Experience of the Future (EOTF) deployment in the United States, building on its success in markets around the world. By elevating the customer experience at McDonald's, this initiative represents one of the greatest opportunities to build on business momentum and increase guest count. Currently, McDonald’s Experience of the Future is deployed in 13% of the restaurants and that number is expected to increase significantly in the next couple of years, with a goal of converting most of the traditional restaurants in the U.S. system by 2020.

Guest Count Expected to Grow

Growing guest count remains the company’s top priority and we expect it continue its efforts to gain customers by focusing on food quality, convenience and value through 2018. Moreover, McDonald’s expects its velocity accelerators of Experience of the Future, digital and delivery to drive growth over the long term. With an almost 10% share of the global informal-eating-out market, there is ample scope for it to grow in the future as it boasts a scale advantage compared to its peers.

Attracting Customers in International Lead & High Growth Markets

McDonald’s is consistently trying to improve its performance in the International Lead Markets, which include Australia, Canada, France, Germany and the UK. The company intends to drive comps growth in these markets through introduction of value meals, customizing the menu to local customer tastes, reimaging of restaurants, efficient marketing and promotions, improved service and increased convenience via delivery. These efforts are expected to continue in 2018.

With the rollout of self-order kiosks, digital menu boards, table service, and the mobile app, customers have more choices and flexibility as the company progresses toward its Experience of the Future initiative, which is based on adding technology to its eateries. Notably, the converted restaurants are now seeing even stronger financial results than those who have not yet made the switch. Meanwhile, management notes that changes in the layout of restaurant dining rooms and service areas are creating better customer flow and giving them the ability to enhance their McCafé and dessert business.

Coming to the High-Growth Markets, the company continues to experience positive results across majority of its markets. Focus on new products, alongside growth across the delivery, value and breakfast platforms has started yielding results and the momentum is expected to continue through 2018.

McDonald's Corporation Net Income (TTM)

Re-franchising Strategy Protects Earnings

Though re-franchising weighs on near-term revenues, over the long term, it will reduce the company’s capital requirements and facilitate earnings per share growth and ROE expansion. Going forward, the company aims to continue optimizing its ownership mix by refranchising restaurants in some of its large mature markets like the United States. Also, it will carry on evaluating other markets to determine whether a developmental license model is an apt one to grow in these markets.

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. Further, it expects to trim another 5 to 10% from its remaining cost base by the end of 2019. Alongside, free cash flow will continue to grow, allowing reinvestment for increasing brand recognition and shareholder return.

Regular Returns to Shareholders

McDonald’s has been regularly rewarding its shareholders through share repurchases and dividends and that will continue through 2018. The company expects to return between $22 and $24 billion to shareholders for the three-year period ending 2019 via dividends and share repurchases. We appreciate McDonald's efforts to consistently enhance shareholder returns, despite the sluggish economy across some of its major international markets. This reflects the company’s business strength and sustainability of its significant cash flows.

Upward Estimate Revisions for 2018

Analysts have increased their estimates for the company for 2018, which makes the earnings picture favorable. Over the past 60 days, five estimates have gone up compared with no downward revision for the next year. This trend has caused the consensus estimate to trend higher, going from $6.94 a share 60 days ago to its current level of $7.01 for the next year.

Zacks Rank and Growth Score

The company has a Zacks Rank #2 (Buy) and a Growth Score of B indicating that it is an impressive choice for growth investors.

Other Picks

Other top-ranked stocks in the same space are Famous Dave's of America, Inc. DAVE, Restaurant Brands International Inc. QSR and Domino's Pizza, Inc. DPZ. While Famous Dave's sports a Zacks Rank #1 (Strong Buy), Restaurant Brands and Domino's carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Restaurant Brands and Domino’s earnings in 2018 are expected to improve 254.3%, 34.5% and 20%, respectively. Current-quarter earnings for Famous Dave's are estimated to grow 70%.

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