McDonald's Corporation (MCD) has increased the variety of choices on its menu to cater to changing customer tastes and dietary inclinations. The company's focus on core brands, its image makeover program, and innovative marketing campaigns have been successful. McDonald's continues to pursue a developmental license strategy in countries where there is limited upside relative to risk.
After doubling margins in its US operations and improving them in Europe, the company is turning its focus to Asia/Pacific, Middle East and Africa, where company-operated restaurant margins lag the US (by 120 basis points in the third quarter). Refranchising continues to be another engine of growth, bolstering ROA by an expected 100 basis points on a less capital-intensive business and a steady growth in royalties.
Finally, we think additional margin and ROE expansion is possible as the company leverages its G&A through cost control initiatives and uses the cash generated from operations to retire debt, distribute dividends, and pursue share repurchases. With a strong balance sheet, we think this stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets.
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