The performance of shares in McDonald's (NYSE: MCD) since the start of the year has been disappointing. It is down by 0.5% versus a rise of over 5% for the S&P 500 (NYSEARCA:SPY). This may lead many investors to think McDonald's is a stock to avoid as it seeks to turn its financial performance around. However, we think the shares will rise in price moving forward due to the following three catalysts.
McDonald's has undergone a major restructuring, which we feel puts it in a much stronger position to deliver a rising top and bottom line moving forward. It has moved away from a geographic structure and instead operates four segments that share similar characteristics. This allows McDonald's to be more nimble and better equipped to adapt and react to the opportunities and challenges which it faces in different markets.
For example, in the US it is focused on digital opportunities, while in foundational markets it is more focused on emphasizing core favorites as well as value. This ability to adapt to different requirements within the business could help McDonald's to be more reactive to local trends and, in our view, could prove to be a key catalyst for earnings and share price improvements moving forward.
The company's restructuring also will lead to the refranchising of around 4,000 restaurants by the end of 2018. It is seeking to become 95% franchised, with the majority of refranchising taking place in high-growth and foundational markets. In our view, this is a sensible strategy, since it means ownership is in the hands of local franchisees who, we feel, are better placed to adapt to local trends and changing consumer tastes.
In this sense, it makes McDonald's a more nimble business which is better able to deliver an enhanced customer experience. As such, both the changes to its organisational structure as well as the refranchising elements of McDonald's restructure look set to act as positive catalysts on its financial performance and share price.
An enhanced customer experience
In our view, the second key catalyst for McDonald's share price moving forward will be its enhanced customer experience. This has multiple threads to it, with the company focusing on product quality, choice and on improving customer service. For example, McDonald's has introduced more options on how customers can order, pay and dine at its restaurants, with it becoming increasingly convenient to do so.
Changes include self-service kiosks, mobile ordering and table service in specific geographies, such as the UK. Together with more choice - from the introduction of an all-day breakfast and a transition back to old recipe favorites, such as the use of butter instead of margarine - McDonald's is on the right track to improving customer loyalty. For us, this means that margin improvement could lie ahead, and this has the potential to boost the company's profitability and share price moving forward.
In addition, McDonald's is seeking to enhance idea sharing across its different territories and segments. For example, the success of all-day breakfast in the US has been mirrored in Australia with the introduction of its own version of the all-day breakfast. While we feel McDonald's is becoming more nimble and better able to react to local trends and challenges, we also think enhanced efficiencies through idea sharing could boost its overall performance and act as a positive catalyst for the share price moving forward.
The third catalyst which we feel will positively impact on McDonald's earnings and share price moving forward is the company's cost reduction strategy. For example, it expects to realize net annual G&A savings of around $500 million from its G&A base of $2.6 billion at the beginning of the 2015 financial year.
Clearly, this will have a positive impact on McDonald's bottom line, and those costs will be reduced from the company's refranchising plans, its strategy to realize greater efficiencies from its Global Business Services platform, as well as a more streamlined resource allocation in the marketing and non-customer facing parts of its business. In our view, such major cost cutting will boost McDonald's profitability and will boost its share price.
Clearly, McDonald's is not without risk. The company's transformation plan is still in its relatively early stages, and there can be no guarantee that it will deliver as expected. Furthermore, the upfront costs to restructure the business and to develop an enhanced customer experience may be significant, and when added to the headwinds which the company faces across many of its key markets, this could lead to some disappointment on the earnings front in the short run.
However, we think McDonald's has a valuation which adequately takes this risk into account. It has a dividend yield of 3% versus 2% for the S&P 500, while its P/E ratio of 19 indicates that when the positive catalysts of an enhanced customer experience, cost reductions and the impact of restructuring are taken into account, the share price is set to rise moving forward, in our view.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.