McDonald’s (MCD - Free McDonald's Stock Report) has more than 36,000 locations in over 100 countries. In fact, most people recognize the distinctive golden arches of the fast-food giant’s ubiquitous restaurants. The company has more than 36,000 locations in over 100 countries. More than 80% of its restaurants are franchised. At least 40% of the company’s consolidated operating income is derived in the United States. Revenues exceed $20 billion annually.
McDonald’s is in the midst of its turnaround plan. A turnaround was necessary because, in recent years, changing consumer preferences and inconsistent quality have hurt the Dow-30 component. Some moves, such as offering all-day breakfast in the United States, have been winners. In addition, McDonald’s has improved its value offerings through its McPick 2 menu. New technology is helping, too. More than 90% of the company’s U.S. restaurants now use digital menu boards. In Canada, McDonald’s has expanded the ways customers can order and pay through the use of kiosks. Management is also paying additional attention to its underperforming restaurants.
Despite signs of improvement, the company admits that its performance in 2016 has been uneven. Turnarounds are rarely easy. McDonald’s faces external challenges, as well. The economy is challenging in some countries, such as Russia. Labor costs are rising in many markets, too. Commodity costs are declining, but even this has a negative aspect: The gap between the cost of eating out and eating at home has widened. Finally, currency translation has hurt earnings.
The latest report in The Value Line Investment Survey elaborates on McDonald’s turnaround efforts. In the Commentary, analyst Matthew Spencer discusses some of the steps the company is taking.
The Statistical Array shows that McDonald’s is hugely profitable, just not as much as a few years ago. In the early part of this decade, net profit amounted to about $5.5 billion a year. We think this figure will be closer to $5.0 billion in 2016 and 2017. Share earnings have risen over that time frame, thanks to a reduction in the share count stemming from stock buybacks. The sharp reduction in the equity base means that a calculation of the company’s return on equity is no longer meaningful.
This issue offers a dividend yield that has some appeal for income-oriented investors, as can be viewed in the Top Label. Both the Array and the Quarterly Dividends box display a strong record of dividend growth. The latest increase, in the fourth quarter of 2016, was $0.05 a share (5.6%) quarterly. Indeed, the board of directors has raised the payout for 40 consecutive years.
Despite the operational and market risks that McDonald’s faces, this equity is still suitable for conservative investors. The Ranks box indicates this issue earns our Highest (1) Safety grade. In addition, the Ratings box displays a Financial Strength rating of A++ and a Price Stability score of 100. These are also our highest marks. (That said, the Commentary indicates that the stock has been more volatile than usual lately.)The Earnings Predictability score of 90 (out of 100) is well above average. Although the company has more than $26 billion in debt, as can be viewed in the Capital Structure box, the same box also assures investors that the coverage ratio is very healthy. The Current Position box shows that the restaurant operator had a cash balance of more than $2 billion as of September 30, 2016.
McDonald’s stock is not cheap. The Ranks box displays a Timeliness rank of 3, which suggests that the stock is likely to merely perform in line with the market over the next six to 12 months. The Array indicates that it has historically traded in a range of a modest discount or premium to the market. The Top Label displays a relative price-earnings ratio of 1.06, meaning that the stock was trading at a slight market premium on the day our latest report was priced. Additionally, a comparison of the Top Label and the Projections box shows that this equity is already trading within our 3- to 5-year Target Price Range. Thus, total return potential over that time frame is well below the market median. All told, these shares are most attractive for conservative accounts stressing income.