McDonald's (MCD) investors look a little fatigued, but it's unlikely to last.
The world's largest fast-food chain crushed it in the first quarter in just about every area. Same-store sales growth of 5.4% not only was consistent vs. the fourth quarter, but it should prove to be the strongest from the fast-food sector after the rest of the group reports in coming weeks.
CEO Steve Easterbrook continues to show he knows what is doing -- from running crisp earnings calls that provide just enough details to implementing serious change at the restaurant level (the guy was almost giddy on the conference call talking about operational improvements). Easterbrook is getting it done, and honestly deserves more compensation than he hauled in last year given the turnaround being orchestrated and size of the company. What's more, McDonald's continues to do well in challenged macro countries such as Russia and China, something not all consumer companies can say right now.
Despite the impressive quarter, however, McDonald's stock barely budged. But the reaction makes sense, seeing as the stock has had an impressive run over the past year and it was pretty well a given the first quarter was going to come in strong. Still, I believe the muted reaction should be used as an entry point into the stock. There are likely several catalysts coming down the pike that could lead to even stronger top- and bottom-line gains in the second half of 2016 -- the sort that aren't reflected in analyst estimates.
Big Mac: Believe it or not, the iconic Big Mac is still pretty popular across the globe (Personally, I think the sandwich is a relic in need of a reinvention). Consider this: McDonald's opened its first restaurant in Kazakhstan, its 120th market, in the first quarter. By the end of the day, the company had sold more than 2,000 Big Macs. This insatiable demand for the sandwich is a good example of the continued popularity of the premium menu item, and a sign that upcoming new versions of the Big Mac could be nice sales drivers.
Look for a big push by the company on these new Big Macs around the Olympics.
McNuggets: Sources tell me to expect some form of new McNuggets around the Olympics as well. Further, I am told the marketing campaign for the Olympics will be huge. If I had to guess, the McNugget is either going to get a spicy companion or several new flavors from around the world. I don't think the company would go with a larger size McNugget because, well, then it wouldn't be a McNugget.
McNugget news will likely hurt Restaurant Brands International's (QSR) Burger King chain, which has made a nice business in the past year selling all sorts of chicken fries (on Monday it launched chicken fries rings, which are basically onion rings made of chicken).
Shares repurchases: Something that got lost in the focus on McDonald's strong quarter of U.S. sales was that the company repurchased a whopping $3.7 billion in stock during the three months. The buybacks, which come while McDonald's stock is trading at lofty levels, are the last leg in the company's $30 billion cash return program. In my view, the purchases express confidence in the future of the company, and at the same time continue to support the bottom line.
I expect McDonald's to announce a five-year plan sometime in early 2017 that will include another big-time commitment to share repurchases. Both the new plan and buybacks will be positive for the stock.
Refranchising: Investors are underestimating what refranchising efforts mean to McDonald's. First, putting restaurants back into the hands of franchisees should free up creativity on the menu and better operational execution (I believe a franchisee runs a McDonald's better than corporate). And this will likely benefit McDonald's P&L in the longer term. Second, the company is starting to show how much in costs it could wipe off its financial statements by refranchising. SG&A expenses fell 1% for McDonald's in the first quarter, which is no joke for a company the size of McDonald's.
Look for expenses to drop dramatically in 2017 as the company unloads certain Asian assets to private equity or another interested party.