Funny as it may sound, investors like to buy into a stock that tells a good story. And over the past few months, McDonald’s stock has been a great story—a story of resurrection. McDonald’s was deemed just another company, in this case a fast food chain, which had failed to change with the times.
But a year later and McDonald’s is in the midst of a powerful turnaround. It’s reinventing its approach and resurrecting its business. Now, will that great story of revival provide enough conviction to buy McDonald’s stock? That’s a different matter, altogether.
McDonald’s Stock; The Winds of Change
The story of McDonald’s revival began in March 1, 2015 when the fast food giant embraced Steve Easterbrook as its new CEO. English-born Easterbrook was already a McDonald’s veteran renowned especially for one particular thing. That is the orchestration of the complete and positive turnaround of McDonald’s UK segment.
And as soon as Easterbrook took the helm at McDonald’s headquarters, he rolled up his sleeves and got to work. His first focus was to revive the brand; essentially he made it his goal to make McDonald’s a cool place to eat again.
Easterbrook realized that McDonald’s was losing a good deal of market share. And it wasn’t because the food wasn’t cheap enough, because it was. It was because consumers viewed McDonald’s as a cheap, i.e. low quality, fast food chain. Moreover, food orders took too long, the menu was too varied and the ingredients were of lower quality.
Steps Led by CEO Steve Easterbrook:
Healthier Ingredients: McDonald’s announced that it was moving into free range and antibiotic-free eggs and chickens. That meant all of the egg or chicken-related menu items would be healthier for consumers.
Scaling back the Menu: McDonald’s scaled back the amount of items on its menu. This made the logistics simpler and thus made the service more efficient and quicker.
Create Your Own Taste & Self-Order Kiosk: An innovative service called Create Your Own Taste allows McDonald’s customer’s to build their own lunch. They can choose their ingredients on a large touch screen menu which offers consumers a unique and fun experience. Moreover, in select branches, McDonald’s is launching self-order kiosks which lets a customer self-order so as to avoid waiting in a long line for a simple order.
New Cooking Methods: Hamburger and sandwich buns will now be heated and a new method will be used to grill beef.
All-Day-Breakfast: As it turns out quite a number of McDonald’s clientele seem to be morning people. When McDonald’s announced the implementation of the all-day-breakfast menu it was greeted with great cheer. The all-day breakfast literally allows customers to order breakfast menu items, such as the Egg McMuffin or hash browns throughout the day. The all-day-breakfast menu has been so popular that it actually boosted McDonald’s comparable sales (sales per restaurant basis)
When crunching all the moves that Easterbrook has advocated it becomes crystal clear. That is that McDonald’s primary focus is on the experience; experience of better food and faster service which will earn back customers’ love.
“McDonald's May Be Set Up for Multiyear Move” Jim Cramer, TheStreet
What does Wall Street Think?
So we have dealt with the McDonald’s resurrection story, but what about McDonald’s stock? After all, that’s what we really care about, don’t we?
No doubt, McDonald’s is a “great story” of revival. But is it great enough to turn McDonald’s stock into an attractive investment?
Turns out it is. Since Easterbrook took control, McDonald’s stock has rallied more than 20% to hit an all-time high of 124.6 per share. Moreover, when it comes to the numbers, McDonald’s was able to beat the Wall Street consensus. For the Q4 2015, earnings per share hit $1.31 vs an expected $1.23. And as you probably guessed, that was cheered by Wall Street.
But perhaps even more noticeable were the highly bullish remarks by investment icon, Jim Cramer. As you likely know, Cramer is a veteran Wall Street investor, Founder of TheStreet and host of the CNBC show Mad Money among his many exploits.
According to Cramer, “McDonald's May Be Set Up for Multiyear Move,” despite already being at a 52-week high. Why? As Cramer says, it’s largely because Easterbrook is “doing the impossible.”
What’s the Game Plan?
Ok, so MacDonald’s is both a stock with a great story and a stock that Wall Street adores. One might presume, given that the foregoing is true (and provided it suits your own circumstances and strategy), that McDonald’s is a buy. The answer would seem obvious, right?
But as Benjamin Graham, Warren Buffett’s teacher used to say, “Buy a stock as you do in the super market; always ask, ‘how much?’” And that’s exactly what your game plan should be in this case. If you decide to buy McDonald’s stock, buy it when it’s in the lower range (see chart below). In other words, buy it when it’s cheap because only then can you turn that great story into great gains.
