At some point, fast-food giant McDonald's (MCD) is going to turn around.
And when that time comes, investors are going to be able to make a couple of bucks from the Golden Arches' Great Rebirth. By the looks of new photos shared in a piece on Real Money Monday, the company has work to do in course-correcting and capturing the minds of investors.
It's not surprising. The McDonald's of today is simply a huge organization, where the great work by one passionate franchisee that owns 10 locations in the Midwest could get drowned out by others not getting the job done in New York. A popular new product in New England, such as the McLobster (yes, it's made from real lobster), could see its sales success get lost in the sauce to weaker sales performance elsewhere in the country due to the super-sized McDonald's menu.
Now, I believe a turnaround in McDonald's sales and profits will be a bit weaker than in prior periods of rebirth for the company. The competition in fast food is more intense, on-demand delivery is becoming a major thing (challenging the drive-thru concept McDonald's pioneered), and the U.S. public is becoming increasingly interested in the sources of its fast food. Further, people are becoming outright vocal on social media forums, which could weigh on a fast-food chain's image just as it's seeking to regain trust.
But rest assured, dividend check collectors, that McDonald's will see brighter days at some point within the next 24 months. Just by refranchising tons of locations across the globe, the company is improving its operating model, and that should flow into the profit line.
Here is a three-step guide in spotting a turnaround at McDonald's:
Sonic: The market may have cooled on Sonic's (SONC) shares, but the reality is that the company continues to post nice gains due to McDonald's struggles. Sonic isn't a better burger chain selling healthier Shake Shack (SHAK) ground beef -- in many respects it resembles McDonald's, except its order customization is best in class. Moreover, it does quite well in drinks and desserts, and it's fun to visit a drive-in restaurant that has a 1950s feel. When McDonald's gets its mojo back, sales at Sonic will likely be increasing far slower than they are at the moment -- they may even go negative. It would be a sign customers are beginning to choose McDonald's over Sonic, for whatever reason.
Taco Bell: The chain operated by Yum! Brands (YUM) is killing it -- during dinner, during breakfast, at all times of the day, basically. Taco Bell's breakfast menu has gobbled up share from McDonald's list of offerings such as the classic Egg McMuffin. In the evening, Taco Bell's revamped menu of drinks and protein-packed Cantina Power items has been very well received. I suspect over the next six months Taco Bell will unveil a host of new items, especially in breakfast. In a McDonald's turnaround, I don't believe Taco Bell will do as well as it is today. No doubt it will continue to post savory sales, but not the eye-popping gains we have been seeing for the past several quarters.
Stock analyst upgrades, in droves: Sell-side analysts have obviously been downbeat on McDonald's amidst its sales and profit struggles. But rest assured that when one analyst issues an upgrade based on field work that shows positive customer responses to new products, or improved customer service scores, peers in the investment banking field will follow suit. What stock analyst wants to miss a major call on a household brand such as McDonald's! Not the one who wants to keep their job. I would be on the lookout for a series of upgrades on McDonald's following a better-than-expected profit quarter. I think that quarter could arrive later this year due to the company's improved operating structure of fewer corporate-owned restaurants.
Absent this layman's guide is a discussion on Shake Shack and Chipotle (CMG), for good reason. Neither Chipotle nor Shake Shack is a true competitor to McDonald's -- each has restaurant bases that are targeting middle-income to upper-middle-income households. If McDonald's is turning around, it's taking back market share in its bread-and-butter locations where incomes are most challenged, and where down the road is likely a Sonic, Taco Bell, KFC or Burger King (BKW). That share gain would be thieved as McDonald's promotional efforts are on track, the drive-thru experience has improved and perhaps a new premium menu item or two is capturing consumer interest.