Shares of McDonald's (MCD - Free McDonald’s Stock Report) rose slightly after the restaurant operator released third-quarter results. The financials were decent, to be sure, but with the stock recently trading at an all-time high and the figures lacking the upside surprise that the company had delivered in the previous quarter, the issue’s gains were modest.
As expected, third-quarter revenues fell from a year earlier due to management's strategic refranchising initiatives (see below). The top line was down 10% on a year-over-year basis, to $5.755 billion, slightly ahead of our $5.724 billion forecast. Global comparable-store sale rose 6.0% and reflected positive guest counts in all segments. Breaking it down by geography, the U.S. market delivered the most modest comp increase, at 4.1%. However, this was still a better-than-expected showing and came in the face of hurricane-related headwinds. The gain was driven by McPick 2 and national beverage promotions. Continued demand for the company's Signature Crafted premium sandwiches also helped. Same-store sales were up 5.7% in the International Lead segment, thanks to strength in the United Kingdom and Canada. A strong performance in China helped to push the High Growth segment's comps up 6.2%, while Foundational markets led the charge with at 10.2% gain thanks to broad-based strength in all regions.
The strong comparable-store sales performance enabled expense leverage and improvements in franchised margin dollars. Combined with a lower share count, adjusted earnings clocked in at $1.76 a share in the September interim, up 9% from a year earlier but a penny below our estimate.
During the September period, McDonald's completed the refranchising of its businesses in China and Hong Kong. The company has been making a push to have a greater percentage of its restaurants be franchised, rather than company owned, and this latest deal enabled leadership to reach its goal of refranchising 4,000 restaurants a year ahead of schedule. Such a shift generally provides for more stable revenues and higher returns on invested capital. Investors should note that the refranchising of locations in China and Hong Kong resulted in a nonrecurring gain of approximately $850 million in the third quarter, which has been excluded from our earnings presentation.
Looking ahead, we expect the company to keep delivering solid results. Promotions should continue to drive traffic, while investments in technology (kiosk and mobile ordering/payment), menu innovation, and restaurant remodels are geared toward speeding service and improving the consumer experience. Our 2017 and 2018 share-earnings estimates remain static at $6.55 and $7.00, respectively, for now.
As for the stock, it is not cheap, but it is very high quality, and we think that it can push somewhat higher still. A focus on shareholder returns through stock buybacks and dividend payments (the quarterly distribution was recently increased 7%, to $1.01 a share) enhance its total return potential. All told, MCD stock is worthy of consideration by conservative investors, in our view.
About The Company:McDonald's is a quick service restaurant with over 37,000 locations in more than 100 countries (as of September 30, 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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
