McDonald's fourth quarter numbers saw like-for-like (LFL) sales rise across the board. Underlying earnings per share rose 18% to $1.97, slightly ahead of prior market expectations.
The quarterly dividend rose 15% to $1.16 per share.
The shares rose 2.8% on the news.
There's more to McDonald's than meets the eye.
That's because it acts more like a property company than a restaurant group. Around 75% of the restaurants are owned rather than leased, and over 90% are operated by franchise partners rather than the group itself.
Shifting more business on to a franchised model has seen revenue fall from a peak of $28.1bn in 2013 to $21bn last year. However, that's only half the story. With the responsibility for maintaining and running the restaurants shifted on to its partners, operating margins have risen from 31.2% to 43%. The net effect is profits have risen.
Franchise agreements are struck on 20 year timeframes, so the model has given McDonald's an improved quality of earnings too. As a result we think the net debt position, which has swelled to around three times annual cash earnings, is manageable.
With much of the day-to-day out of the way, McDonald's can focus on overarching issues across the group. That's probably for the best, as the group had been ceding ground to close competitors in its core US market.
CEO Steve Easterbrook has done a good job of getting the customers back. His recipe for success has been a simple one. Focus on upgrading the menu, increasing the digital capability and working with partners to improve the in-store experience. Think in-store WiFi, interactive boards for DIY ordering, and a new delivery offering.
Around 1,000 stores a quarter are being kitted out, but the majority of US stores are yet to get a makeover. This should mean there are plenty of easy wins to come, which helps explaining why the shares change hands for 22 times expected earnings, a sizeable premium to the historical average of 17.8.
That lofty rating puts the pressure on the group to deliver, and investors shouldn't take anything for granted. Competition across the casual dining industry is intense, and politicians the world over are increasingly focused on diet and lifestyle choices.
Overall though, we think there are reasons for optimism. McDonald's has built an incredibly strong brand over the last 70 years, and the recent changes all seem to be with the long-term health of the business in mind.
The prospective yield is 2.5%, and investors will be hopeful the payout can increase in the future.
Fourth quarter revenue fell 3% to $5.2bn, bringing full year sales down 7.8% to $21bn. However, that reflects changes to the continued shift to franchising. LFL sales rose 4.4% in the quarter and 4.5% in the year.
In the US, Q4 LFL sales rose 2.3%, driven by a shift to higher priced items and underlying price increases. Reduced gains on the sale of restaurants saw operating income slip 1%.
International LFL sales rose 5.2%, with the UK, Germany and Australia delivering strong performances. Improved margins saw operating profit rise 8%, or 12% once unfavourable currency movements are excluded.
High Growth and Foundational markets saw quarterly sales rise 4.8% and 7.1% respectively, with Japan, Italy and the Netherlands making positive contributions.
While capital expenditure rose from $1.9bn to $2.7bn, a 25.5% increase in operating cash flow, to $7bn, meant free cash flow rose from $3.7bn to $4.2bn.
Despite this increase, the non-recurrence of asset sales in China, a higher dividend, share repurchases meant net debt, measured as long term debts minus cash and cash equivalents, rose from $27.1bn to $30.2bn.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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