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Why McDonald's Stock Gained 41.4% in 2017

By Keith Noonan - Jan 16, 2018 at 7:42PM

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McDonald's hasn't looked this good in years.

What happened

McDonald's Corporation ( MCD 1.59% ) stock climbed 41.4% in 2017, according to data provided by S&P Global Market Intelligence. Strong earnings reports and evidence that the company's efforts to tailor its menu consumer tastes are proving effective helped the stock notch market-beating returns last year, and things could still be heating up for the fast-food giant.

So what

McDonald's business seemed to be firing on all cylinders in 2017. Its domestic and international geographic segments each saw improved customer traffic, promotional campaigns for beverages and value items were successful, and new products like premium sandwiches were a hit with customers. 

A sausage egg McMuffin and a bagel with cream cheese on it.

Image source: McDonald's. 

The company also managed to continue trimming its operating expenses and made big progress on its refranchising plan, having increased the percentage of franchisee-owned locations from 85% in 2015 to 93% at the end of 2017. That's putting downward pressure on total sales, but it's also making the business more profitable. McDonald's operating margin hit roughly 40% in its September-ended quarter, up from 33% in the prior-year period, which helped send currency-adjusted earnings per share up 53% over the year-ago period. 

Now what

McDonald's should easily hit its goal of getting its percentage of franchisee-owned stores up to 95% in 2018, and the company has some promising earnings catalysts on the horizon. Management expects that the refranchising initiative, cost-cutting, and other factors will help increase the business' operating margin to somewhere in the mid-40% range in 2019. Also encouraging is the fact that the company has also been recording same-store traffic growth that trounces that of leading competitors, which could be an indication that the Golden Arches is moving past some of the negative brand associations that have hindered the business. A push into delivery and increased automation present additional avenues to expanding earnings.

With growth picking back up, a 2.3% dividend yield and 41-year history of consecutive annual payout increases, and a business model that limits the company's risk during periods of economic downturn, there's a lot to love about McDonald's stock right now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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