McDonald's Drive-Thru Turnaround

We've all come to expect blazing comparable store sales growth from the likes of Starbucks (Nasdaq: SBUX  ) and Chico's FAS (NYSE: CHS  ) -- but McDonald's (NYSE: MCD  ) ? Believe it. Last night, the world's largest fast-food chain reported a remarkable 11% increase in July comparable store sales.

Saturated fat and all, consumers apparently agree with McDonald's new slogan, "I'm lovin' it." On a constant-currency basis, comp sales increased by 7%. This includes all of McDonald's restaurants, including Chipotle, Donatos, and Boston Market. But even isolating just the McDonald's brand alone, comps were up a solid 4.2% on higher sales of its flagship Big Mac sandwich, premium chicken sandwiches, and breakfast products such as the terrific new McGriddle sandwich.

In reaction, the stock is up more than 6% today, to $23 and change. This puts McDonald's almost 100% higher than its March low of $12. Amazing that only a short five months ago, investors were practically in hysterics over the company's first quarterly loss in 38 years (mostly due to accounting write-downs; the cash loss was much less severe).

Admittedly, few expected McDonald's to right its ship so quickly. New CEO Jim Cantalupo stepped in and quickly implemented a common-sense strategy of maximizing sales at existing locations through higher-quality food and better service. So far, so good, based on the comparable store sales we're now seeing.

Another good sign is the company's operating cash flow, which year-to-date is at $1.24 billion, up slightly vs. a year ago. Cantalupo has been using this cash to pay off debt -- $400 million so far this year.

In retrospect, McDonald's was a screaming bargain in the mid-teens. A few Fools happened to see it, too. One month after the stock hit bottom, Bill Mann applauded incoming CEO Cantalupo's new slow-growth strategy. Less than one month later, David Gardner waxed bullish on the shares: "There are significant challenges, but you're buying a premiere brand name during an out-of-favor period, piloted by a turnaround CEO."

That out-of-favor period didn't last long, however. Analysts now expect McDonald's to earn $1.34 per share this year, putting the stock at a forward P/E multiple of 17.6. For a company pursuing an explicitly slow-growth strategy, the stock appears to be back in the range of fair value.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 535118, ~/Articles/ArticleHandler.aspx, 10/25/2014 7:36:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...