McDonald's Corporation (MCD, Financial) is one of the world's biggest QSR Restaurant. The company operates and franchises McDonald’s restaurants, which serve a locally-relevant menu of quality food and drinks sold at various affordable price points in more than 100 countries. McDonald’s global system is comprised of both company-owned (~20%) and franchised restaurants (~80%). McDonald’s franchised restaurants are owned and operated under one of the following structures: conventional franchise, developmental license or affiliate. Going forward, the company intends to increase the mix of franchised restaurants to 90%.
The company's revenues has increased from $22.745 bn in 2009 to $28.106 bn in 2013. However, recently the company is seeing some headwinds and its revenue decreased to $27.441 bn last year. The company's EPS followed a similar trend and after increasing from $4.11 in 2009 to $5.55 in 2013, it decreased to $4.82 in 2014. Going forward, in FY2015, analysts are expecting the company's topline to decline to $24.97 bn and its EPS to decline to $4.76.
This declining performance has made management rethink the company's strategy. The company's board has installed a new CEO to lead its turnaround. Management is now focusing on investing in menu and technology. The company is also focusing on moving towards “asset-light” franchisee model and intends to reduce its owned stores to ~10% of total store base. Recently, the company has stopped reporting monthly sales numbers which indicates the longer term view which management is taking rather than focusing on month to month sales numbers.
Deutsche Bank analyst Karen Short recently initiated coverage on McDonald's with a Buy rating calling the company a “top pick” in the restaurant sector. In her research report she wrote,
"A new CEO and organization structure/ownership mix changes are among moves aimed at reversing MCD’s fortunes after another year of lackluster EPS and stock performances. The willingness to question once off limits strategies and sacrifice “sacred cows” philosophies while investing in menu and technology may begin to drive results in the not-too-distant future. Despite healthy investor skepticism on whether MCD's "arches are broken", MCD remains an iconic global and fixable brand, in our opinion, with a sizeable real estate portfolio."
Short also believes that investors are not pricing in any potential of the company's strategic turnaround. She has a target price of $120 on the stock, implying over 25% upside from the current levels.
McDonald's is trading at a forward PE of 18.6 and has a dividend yield of 3.50%. Management intends to return $18-$20 bn to shareholders from 2014-16 which should provide support to the stock. I believe the company is a good turnaround story to bet on.
