Shares of McDonald's (MCD - Free McDonald's Stock Report) moved nicely higher in a sharply lower tape after the restaurant operator released strong third-quarter results. The interim marked the 13th-consecutive period of positive global comparable-store sales, with the metric up 4.2%, driven by gains in all of the company's geographic segments. Foundational markets led the charge with a 6.0% advance, headlined by results in Japan. The International Lead segment wasn't far behind with its 5.4% gain, which was driven by robust demand in the United Kingdom, Australia, and France. Elsewhere, solid receipts in Italy and the Netherlands resulted in a 4.6% same-store sales increase in the High Growth segment. Bringing up the rear was the United States. Although the 2.4% gain posted on our shores was just shy of the Wall Street consensus, which was closer to 2.5%, the figure was far from being a major disappointment, especially given numbers from around the rest of the globe. U.S. comps were helped by growth in the average check, which was driven by a favorable product mix and menu price increases. Broadly speaking, management's efforts to remodel and modernize restaurants, enhance the guest experience through the use of technology (both customer facing and behind the counter), menu innovation, the rollout of delivery services in some markets, and a continued focus on value all helped to lure diners.
Taking a closer look at the income statement, the top line decreased 7% from a year earlier, though this was due to currency fluctuations and refranchisings. Indeed, systemwide sales actually increased 5% (in constant currencies) on a year-over-year basis in the September period. The top-line figure came in a hair below our $5.387 billion forecast, at $5.369 billion. Despite the marginally lower top-line figure and a $0.05-per-share headwind from unfavorable foreign currency movements, share earnings clocked in at $2.10, $0.09 ahead of our call and 19% higher than the adjusted year-earlier figure. Aided by the aforementioned refranchisings, SG&A costs fell from a year earlier, as did company-operated restaurant expenses. Interest expenses moved higher, but a lower tax rate and share count supported the bottom-line tally.
Looking ahead, we expect results to remain strong as management stays the course with its refranchising and modernization efforts. Competition is fierce, but the company's focus on value and convenience should serve it well, along with its enviable real estate in prime locations. Foreign exchange will likely remain a headwind in the final stanza of 2018, though we look for commodity costs inflation to ease. All told, we have added a dime to our full-year 2018 share-net call, which now stands at $7.80.
As for the stock, we continue to believe that it has appeal for conservative investors. Capital gains potential is nothing to write home about (the stock recently traded close to its all-time high), but the equity does have other favorable attributes, namely our Highest (1) rank for Safety, a top score for Price Stability (100), and a dividend yield that is above the Value Line median. Regarding the last point, the quarterly cash distribution was recently raised 15%, to $1.15 a share. All told, conservative income seekers can find plenty to like here, in our view.
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, CFA
