Here's Why The McDonalds Turnaround Is Real

  • McDonald's shares yield over 3% even at current prices.
  • The company can give most net income to shareholders because of the franchise model
  • CEO Steve Easterbrook is shaking things up and getting results.

There remains a lot of bearish sentiment around McDonalds (NYSE:MCD) but it’s overdone. The company’s turnaround is very real. New CEO Steve Easterbrook has gotten franchisee buy-in to moves like all-day breakfast. He has gotten buzz back into the stores with new menu items. And he has gotten some bottom-line results.

The most recent earnings -- $1.3 billion in net income on $6.6 billion in revenue – represent a nearly 30% gain on net despite a 5% drop in revenue compared with the figures a year earlier. Easterbrook, in other words, is not wasting the shareholders’ money, yet the September revenue figure was still up 10% on the March quarter’s $5.9 billion. That’s real progress.

Even though the stock now carries a Price/Earnings multiple of nearly 25 it is still a steal, given that it has a yield of 3.1%. McDonald’s has put $3.11/share back into shareholders’ pockets, out of $4.63 in earnings. That short leash is possible because McDonald’s revenue represents only a fraction of what the restaurant is taking in. The actual business, 90% of it run by franchisees, may be 10 times bigger.

The franchise model means that McDonald’s gets a significant multiplier from the impact of changes made by franchisees. Most of it goes straight to the bottom line. Since Easterbrook became CEO in January, the stock is up 25%, with most of the gains coming since the August stock market bottoming.

The changes Easterbook has engineered, meanwhile, have barely begun. The new “McPick” option – two items out of a specific list for $2 – looks like a hit. The all-day breakfast option is helping results from the company’s McCafe line of coffee drinks, which compete with Starbucks (NASDAQ:SBUX). The company has begun retraining staff at its drive-thrus to reduce mistakes. The company has also begun testing a new “luxury” concept in overseas locations.  Its thicker “signature burger” collection is expected to launch widely next year.

Just how far Easterbrook can go may be seen in the company’s UK stores, which he previously ran, and which have become showplaces for what is possible within the fast food format. There, the company gets consumer participation in its advertising, employees throw surprise parties for customers, and stores are redesigned regularly, sometimes with astonishing results.

What the UK experience shows is that Easterbrook is constantly trying things. He isn’t content, as the previous management was, to continue turning out rotten food with underpaid, inattentive staff. He is shaking things up, and the shake-up continued after his departure.

You may not like McDonalds stock at these levels, but personally I’m loving it.

 

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