MCD Stock Could be Set to Soar in 2016
It’s no secret that McDonald’s Corporation (NYSE:MCD) has faced a rough time in the last few years. With overall revenue levels declining since 2013, MCD stock has been in the doldrums for the past few years.
However, change in terms of growth does not come easily to a company with more than 36,400 locations in over 125 countries. Opportunities for growth in the developed and highly competitive food industry are limited, especially when you operate on a global scale. To make matters worse, the unprecedented public interest in healthy eating has not worked in the fast food giant’s favor, with McDonald’s ill-fitted to engage with nutrition-conscious consumers.
But if you thought McDonald’s is finished, then think again. The company has recently made huge moves with some very clear positive results. Under the leadership of its new CEO Steve Easterbrook, McDonald’s is restructuring its menus and business operations, closing down unprofitable locations, and concentrating on fine-tuning menus for greater consumer appeal.
While making any conclusive statement may be a tad premature at this point, you can bet that McDonald’s has made an impressive turnaround in a short space of time. Things are looking increasingly bright for the fast food giant and huge upside growth potential may be on the horizon for the MCD stock price.
MCD Stock Price Forecast
McDonald’s announced positive sales volumes in the third quarter of 2015. Overall global sales levels grew by four percent year-over-year, while U.S. sales growth figures were not nearly so encouraging, at 0.9%. However, this is the first time they have risen in two years. This is very positive news and the company’s management has forecasted this figure will only increase in the fourth quarter of 2015. (Source: “In one chart: McDonald’s remarkable rebound,” Market Watch, December 7, 2015.)
While some analysts might be staying bearish on MCD stock, arguing that a single positive financial quarter is no indication McDonald’s can turn things around, they are seriously downplaying how well Easterbrook has turned things around. After several years of less-than-stellar results, McDonald’s is finally starting to make all the right moves.
The big homerun was, of course, the introduction of all-day breakfast in October 2015 in U.S. stores. The restaurant’s breakfast menu has been a long-time customer favorite. While this new policy is less than two months old, it has already translated to positive sales growth, which underlines just how good of a strategy it was. As a matter of fact, overall sales per customer have increased as a result of the all-day breakfast offerings, outperforming initial expectations.
This is a crucial step in the company’s recovery. Fast food rivals such as Burger King and Wendy’s have seen average spending per customer rise over the last few years, while McDonald’s has not. While 0.9% growth in U.S. sales may not seem like much, we’re talking about a company with total market share of $27.4 billion. Do the math and it’s clear this growth figure represents hundreds of millions of dollars. (Source: “Wendy’s taking bite out of McDonald’s profits,” CNN, August 5, 2015.)
How McDonald’s Plans to Address Growing Pains
Despite these positive steps forward, along with encouraging financial results, the path ahead will be riddled with obstacles.
Shifting popular consumer tastes have long been a hindrance to McDonald’s growth trajectory. As more and more young customers are looking for fresh food with organic options, McDonald’s has responded with attempts at making wraps, salads, and other healthy options. However, this has slowed down its drive-thru conversion rates, only complicating already bloated menus. As a result, sales growth was down in 2013–2014, but a growing recognition that McDonalds can’t compete directly in this market segment is crucial going forward.
The company’s new CEO has made strides to downsize large menus, focusing on what McDonald’s does best. The trick, of course, is downsizing while experimenting intelligently with what market research says consumers want. There is no reason that McDonald’s can’t offer the sorts of items people are buying at Chipotle or In-and-Out Burger, while simultaneously staying true to its existing customer base in a more focused and efficient manner. In the U.K., for example, the company plans to offer three upscale varieties of hamburger, made exclusively from local beef. (Source: “McDonald’s launches its new Christmas menu,” Daily Mail, November 26, 2015.)
But there could also be indirect benefits as a result of lower gasoline prices, which have translated to more people driving, thus more people are using drive-thrus. McDonald’s market presence is advantageous in this regard and it has the growing sales numbers to prove it.
Aside from streamlining menus, Easterbrook has endeavored to cut down on overall expenses. The company is forecasting it will be able to slash approximately $500 million in expenses by 2018. (Source: “McDonald’s is slashing costs, but can it do more?” CNBC, November 11, 2015.)
But it doesn’t end there. McDonald’s will also be launching efforts to refranchise roughly 4,000 of its locations, up from the original plan of 3,500. With a larger portion of stores in the hands of franchisees, the company rakes in franchise fees without the liability of running the stores. The end result is a net benefit from a financial perspective, making the business more profitable overall.
Now that’s what I call a solid strategy for going forward.
The Bottom Line on MCD Stock
If it wants to retain what made it so successful in the first place, the challenge for McDonald’s is growing, while simultaneously getting back to the basics. The company must now reverse roughly two years of declining sales levels, while incorporating the growing demand for healthier lifestyle and nutritional food choices. If McDonald’s can do this successfully, MCD stock could absolutely skyrocket in the coming years.