Shares of McDonald's (MCD – Free McDonald’s Stock Report) pulled back slightly in a sharply lower tape after the restaurant operator and Dow-30 member reported fourth-quarter and full-year 2017 financials. The report made for good reading, to be sure, but with the stock trading near an all-time high going into the release, it was unable to climb further and swim against the tide of profit taking that ensnared the broader market on this particular day.
McDonald's systemwide sales increased 8% on a constant-currency basis, and global comparable-store sales jumped 5.5%, reflecting positive guest counts in all segments. However, due to management's strategic refranchising initiatives, the top line fell 11% (15% in constant currencies), to $5.340 billion, though this was nicely ahead of our $5.219 billion forecast.
Looking at sales in more detail, Foundational markets led the charge with an 8.0% increase in comps, followed by the International Lead segment, which posted a 6.0% advance driven by ongoing strength in the United Kingdom and Canada. In the important U.S. market, same-restaurant sales were up 4.5% thanks to the McPick 2 menu, value-priced beverages, increased delivery services, and consumers' taste for new Buttermilk Crispy Tenders. The High Growth segment brought up the rear, posting a 4.0% advance. Here, a strong performance in China was partially offset by challenges in South Korea.
The increase in comps, combined with higher franchised margin dollars, helped push adjusted earnings notably higher on a year-over-year basis. SG&A expense savings, an improved performance in Japan, and a $0.04 benefit from foreign currency movements all helped, as well. Excluding an $0.84-a-share charge stemming from a net tax cost associated with the recently enacted Tax Cuts and Jobs Act, earnings rose 20% from a year earlier, to $1.71, well ahead of our $1.59 call. For full-year 2017, global comparable-store sales were up 5.3%; systemwide sales increased 7% in constant currencies; and adjusted share earnings clocked in at $6.66.
Looking ahead, we expect the good times to continue for this restaurant operator. Menu innovation, a relentless focus on value, remodeled restaurants that appeal to today's consumer, curbside pickup, expanded delivery services, accelerated store remodels, and mobile order/pay functionality are all growth drivers, in our estimation. Meantime, development plans call for the opening of roughly 1,000 restaurants. According to management, the 2018 tax rate will likely be 25%-27% (our previous call was 32%). Consequently, we have tentatively raised our share-earnings estimate for this year by $0.40, to $7.40.
As noted above, MCD shares recently traded at an all-time high after delivering a stellar performance in 2017 and a good start to 2018. Consequently, the shares are not cheap, which may give value investors pause. Growth accounts, however, especially those with a conservative bent, will likely find this equity attractive given its dividend yield (which is above the Value Line median), low Beta coefficient, and top marks for Safety (1) and Price Stability (100).
About The Company: McDonald's is a quick service restaurant with some 37,000 locations in more than 100 countries (as of December 31, 2017). The majority of the restaurants (over 90%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
— Matthew E. Spencer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
