On the Margin
Investors bet on a McDonald's comeback

Investors bet on a McDonald's comeback

This post is part of the On the Margin blog.

Don Thompson resigned as CEO of McDonald’s Corp. in late January of this year, and was replaced by Steve Easterbrook. The result has been a boon for McDonald’s in one area: Its stock price.

The Oak Brook, Ill.-based burger giant’s stock hit a new 52-week high on Tuesday, 101.44, after steadily rising for days. That was the highest level for Golden Arches stock since July of last year.

Investors are clearly betting on a McDonald’s turnaround. The company is cutting $300 million in general and administrative spending, including some layoffs. It is ridding itself of bureaucracy. It is changing the size of its burgers. It is closing underperforming locations, franchising more, is less resistant than ever to a real estate spinoff and is bringing in numerous outsiders to both its board of directors and management team.

The company is also adding important functionality to its mobile app that it promises to roll out nationwide by October, a badly needed move in an era in which consumers can’t remove their eyes from their smartphones.

It is also plotting an October rollout of all-day breakfast, in what some argue is the company’s biggest move in two decades. While there remains healthy skepticism about breakfast among some analysts and some franchisees, to others it’s arguably the biggest and best hope for a quick sales turnaround at the burger concept.

None of these efforts have translated into actual sales results yet. Same-store sales fell 2 percent in the U.S. in the second quarter, underperforming its QSR peers by 570 basis points, based on NRN same-store sales data. But stock trading is about predictions, and investors are predicting that some of McDonald’s efforts will bear fruit.

Indeed, under Easterbrook, the chain’s stock has risen more than 16 percent. By contrast, the S&P 500 stock index is up 4.7 percent over that same period.

That outperformance followed more than three years in which McDonald’s underperformed the S&P. Under Thompson, McDonald’s stock price rose 9.5 percent, but the S&P rose 47 percent.

Investors have been looking for bargains among restaurant companies, given historically high valuations among publicly traded concepts. And McDonald’s, despite its seemingly high price, has a low valuation. Its ratio of price to forward earnings is 19, lower than any other major QSR company even after the recent run-up in stock price.

By comparison, Restaurant Brands International, Wendy’s, Jack in the Box, Sonic and Yum Brands all average a private-to-earnings ratio of 26. A low valuation and some moves in the right direction are enough to push McDonald’s stock higher.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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