For a large part of 2015, McDonald's (MCD, Financial) stock was depressed as investors waited cautiously for announcements by the company on growth revival plans. However, post September 2015, the stock has trended higher with 27% upside in the last six months. The positive momentum is likely to continue for McDonald’s.
The trigger for this article is the news that McDonald's plans to add more than 1,500 new restaurants in China, Hong Kong and South Korea within the next five years. I have always maintained that emerging markets are likely to be the key focus for McDonald's from a growth perspective. If things progress according to plan, McDonald's revenue from emerging Asia can be expected to increase gradually as a percentage of total revenue.
However, McDonald's has several challenges in emerging markets. If McDonald's is able to overcome them, I expect the stock to continue trending higher. The first point is related to China and other emerging markets – local taste preference and emergence of new players in these regions. As a BBC article mentions, McDonald's and other players are facing competition from cheaper local rivals as bigger companies recover from food safety scares.
In particular, local players have a better sense of the taste preference, and it is the key factor that will determine if McDonald's can witness sustained growth in China. While India is still small for McDonald's as compared to China, the country can also be a big revenue and growth destination in the next 10 years if the company manages to remain in sync with local taste preferences.
Another important point is that McDonald's has nearly 2,800 restaurants in China, Hong Kong and South Korea. However, a majority of these restaurants are company owned. In the coming years, McDonald's expects to grow through franchisee outlets, and this is a good strategy for remaining relatively asset light.
When I last wrote on McDonald's, I mentioned that the company’s all-day-breakfast menu will drive stock upside and comparable restaurant sales growth in the foreseeable future. However, international expansion will determine if McDonald's can continue to grow at a healthy pace even in the next five to 10 years.
Besides the points related to growth and expansion, McDonald's is an excellent stock from a dividend perspective with the company currently paying a dividend of $3.56 per share. Dividends are likely to increase on a year-on-year basis if growth plans translate into strong EPS and cash flow numbers.
There are several positive triggers for McDonald's in the coming quarters, and the company has been successful in reviving comparable sales growth. Growth in Asia should trend higher on aggressive expansion plans; if the company is successful in providing a menu that matches local taste preferences, the next 10 years can be big for the company in China and India.
Disclosure: No positions in the stock.
