McDonald’s Stock Up 8% On Positive Comps Across All Major Markets

Yes! The tables seems to have turned — at least for now. The Golden Arches have finally taken a U-Turn.

McDonald’s (NYSE:MCD) stock touched its all-time high, crossing $110 after the burger giant reported positive comparable store sales growth in all the reported segments. Although the company reported a 5% year-over-year (y-o-y) decrease in the net revenues to $6.6 billion, it seemed that the investors were more delighted with the 4% increase in the global comparable store sales. ^[1] McDonald’s reported a diluted EPS of $1.40, up 28% year-over-year (y-o-y), beating the EPS market estimate by 12 cents. It seems like the turnaround plan and the recovery efforts in the Asian markets are finally paying off.

Was the reaction of the stock justified? And what to expect from McDonald’s from here on? Let’s find out:

Trefis has a $99 price estimate for McDonald’s, which is 12% below the current market price. However, we will soon revise the stock price estimate after assimilating the earnings result.

See Our Complete Analysis For McDonald’s Corporation

McDonald’s Needs To End The Year On a High

Last year’s China meat scandal definitely gave a solid jolt to the company’s top-line performance in China and Japan. Soon after the company’s stock dropped, but found a resistance level at $90. It was followed by several small headwinds in the U.S., Japan, and some of the European countries. Additionally, the company faced negative comparable sales growth for most of the months in 2015, with their previous CEO Don Thompson stepping down from the position. Even though all these scenarios did harm the company’s operational flow and brand appeal, they were not strong enough to drain investors’ hope in the company.

On the other hand, even some minor pleasant news was strong enough to drive the stock towards the higher end of the $90-$100 range. This clearly indicated the maturity and strength of the company’s stock even in this tough period. Somehow, it further made the investors more confident of the fact that one good performance might just be a turnaround point. With recovery efforts finally picking up pace and a new turnaround plan, the company was waiting for a positive quarterly result, and when it did hit, the stock responded with a strong move higher.

• U.S. Market: Positive Sales Growth Finally

McDonald’s business in the U.S. markets accounts for 40% of the operating income, making it one of the most important regions  for the company. In Q3, the segment’s comparable sales grew 0.9%, breaking the deadlock of negative comparable sales growth in the U.S. for the last two years. Improvement in the quality of the food, introduction of new menu items, and efficient marketing improved the customer’s perception and experience. Apart from this, some of the operational efficiencies, such as improving order accuracies, removal of some of the less ordered items, and an efficient menu for the drive-thru outlets, led to improved net income. Moreover, the mobile payment app is getting tremendous reviews from the customers, with over 2 million downloads till date. (Ref:1)

Improvement of the comparable sales in the domestic market can be taken as an indication of the company’s improved revenue growth and increased transactions. Even though the turnaround plan is still in its nascent stage, it seems like other changes in the company’s operations are being noticed and appreciated by the customers.

• International Lead Markets: Stronger Growth

According to the company’s restructured business segments, the International Lead Markets account for 40% for the operating income. Among the markets in this segment, the U.K., Australia, Germany, and Canada were the outperformers. New menu introductions and positive customer response to innovative campaigns led to 4.6% growth in the comparable store sales.

‘Create Your Taste’ initiative in Australia has been receiving solid response, and has been a great contributor to the increased customer traffic in the region.

• Troublesome Regions Showing Top-line Growth, Excluding Japan

Russia, Japan, and China have been the topic of concern for McDonald’s over the past 12 months, due to respective issues faced by the company in those regions. According to the company, Russia and China witnessed positive comparable sales growth in the third quarter, as the recovery efforts and some operational changes started showing results. China posted comparable store sales growth of 26.8% for Q3. Even though the region was facing comparison with last year’s terrible results in third quarter, it still is a better performance if considered in absolute numbers.

On the other hand, since the onset of this year, the company, through strict recovery efforts, such as changes in cooking techniques to improve taste and hygiene, introduction of promotional offers, and the use of better cooking ingredients, has been trying to revive customer trust in Japan. However, the region is still facing flat customer traffic, and with expected full-year results from the region, it would be a concerning driver for the next year as well. (Read: McDonald’s Relying On Performances in Asian Markets For A Turnaround In Q3 Results) McDonald’s expects these regions to further improve in terms of sales growth and margin growth in the fourth quarter.

With improvement in McDonald’s sales and margins in China, continued stronger performance in the U.K., Germany, and Australia; and an improving situation in the U.S., the company is confident of its sales growth in the fourth quarter, as well. No doubt, the recovery efforts have shown humongous results in China and will only further pick up in the coming months, and not to forget, the turnaround plan has only just started to show signs of life. With hopes driven further and higher for the investors, it would be interesting to see how the final quarter of the year turns out.

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1. McDonald’s, Q3 2015, earnings call transcript [↩]