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Will 2018 Be McDonald's Corp.'s Best Year Yet?

By Rick Munarriz - Dec 7, 2017 at 9:05AM

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The world's largest restaurant operator by sales volume is beating the market in 2017, and the year ahead could be even better.

There's no denying that McDonald's (MCD 2.46%) is having a heck of a year. The fast-food giant has seen its shares hit new all-time highs every single day this week, trading 46% higher so far in 2017. McDonald's stock has now more than doubled since Steve Easterbrook was tapped as the chain's CEO in early 2015, but that doesn't mean it's due for a breather next year.

A lot of the brand revival and profit-popping initiatives are just starting to bear fruit, and 2018 will be another year where investors can ignore the top-line declines and focus on the booming earnings growth. Mickey D's has never been as valuable as it is right now, but the chances are good that it will be worth even more a year from now. 

The three new signature artisan sandwiches at McDonald's on a cutting board.

Image source: McDonald's.

A tale of two lines

McDonald's has posted year-over-year declines in revenue for 14 consecutive quarters, and analysts see more of the same in 2018. Wall Street's targeting $20.4 billion in revenue, 10% below this year's forecast. This isn't as bad as it seems at first glance. McDonald's is handing over more and more of its company-owned locations to successful franchisees. More than 90% of the chain's roughly 37,000 locations worldwide are no longer company-owned after refranchising more than 4,000 units this year. 

The refranchising effort means exchanging unit sales with smaller franchisee royalty payments, but it pays off on the bottom line as margins expand. Revenue through the first nine months of 2017 has declined by 6%, but operating profits have soared 28%. We should see more of the same in the year ahead, as analysts are modeling a profit of $7 in 2018 -- 7% ahead of this year and 23% more than it earned in 2016. 

Now is probably a good time to address valuation. The stock has moved faster than earnings growth, so the stock's multiple has increased over the past year. McDonald's stock is fetching 25 times forward earnings, a historically high ratio. 

However, McDonald's keeps impressing the market with its performance. The turnaround that began with Easterbrook's arrival in early 2015 and the rollout of All-Day Breakfast later that year continues. The barbell approach to pricing where value-priced eats are offset by pricier artisan sandwiches and premium McCafe beverages is resonating with consumers. Global comps rose 6% in the third quarter. 

McDonald's is also raising the bar with home delivery through UberEATS, self-serve ordering kiosks, and a mobile ordering app with a heavy dose of digital coupons. All of these trends should continue to pay off in 2018. 

It will take a lot to go right for the stock to top this year's pop, but there's no reason to think the stock won't be higher by the time 2018 is over. McDonald's continues to evolve. The introduction of a new Dollar Menu that includes items at the $1, $2, and $3 price points is a lock, and offerings on the higher end of the pricing spectrum are also likely. While this is all playing out, McDonald's continues to make headway with its long-term plan to return $22 billion to $24 billion to shareholders through dividends and share buybacks over the next three years. 

The new year is unlikely to top 2017's 46% gain, so it won't be the chain's best year yet. However, with so many trends breaking its way and momentum in its corner, it's hard to bet against McDonald's stock moving higher for the fourth year in a row with Easterbrook at the helm.

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