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Stock Strategist

McDonald's Poised to Accelerate Growth

Management improvements, operational enhancements, and a strong cash return profile should keep this stock on the radar.

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 McDonald's (MCD) fourth-quarter update served largely as affirmation of management’s recent turnaround strategies. Now, with 2016 in the rearview mirror, we turn our attention to several factors that will dictate the strength of the firm’s wide economic moat and form the basis of our investment thesis in the years to come. Top among these are the implementation of Experience of the Future operational features in the United States and other regions, including improved speed of service, greater menu/marketing decisions at the regional level, and adopting consumer-facing technologies, each of which should have a positive impact on guest counts as 2017 progresses and into subsequent years, supporting our five-year average global comparable sales growth outlook of 3%. Refranchising plans and selling, general, and administrative expense eliminations reinforce our outlook calling for mid-40s operating margins over the next five years, something that may not be fully priced into market expectations.

Finally, backed by expectations of improved comps and a less capital-intensive franchised business model, McDonald’s should remain a compelling income play, with the possibility of more than $15 billion returned to shareholders via buybacks and dividends over the next three years. While we’d prefer a wider margin of safety, we think longer-term investors should keep McDonald’s on the radar screen because of the firm’s management improvements, operational enhancements, and a strong cash return profile.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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