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Here's Why Investors Should Hold On to McDonald's Stock Now

McDonald's Corporation’s MCD various sales building initiatives, expansion efforts and focus on drive-thru, delivery & take-away continue to drive performance. Despite the coronavirus pandemic, the company’s shares have gained 8.2% year to date, compared with the industry’s growth of 2.7%. However, dismal traffic and high debt remain a concern. Let’s delve deeper.

Key Catalysts

The company has been focusing on drive-thru, delivery & take-away amid the ongoing the coronavirus pandemic. While drive-thru accounted for about two-thirds of all sales in the United States prior to the pandemic, it now accounts for approximately 90% of sales. Moreover, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. It has already launched the option in nearly all 20,000 U.S. restaurants. To provide enhanced experience and convenience to customers, McDonald’s has been increasingly focusing on delivery. The company provides delivery from more than 27,000 restaurants in above 75 countries. In third-quarter 2019, it partnered with Grubhub for the rollout of McDelivery to nearly 500 restaurants in the NYC and Tri-State area. It has also partnered with DoorDash.

The company announced that Australia posted positive comps for May and June driven by strong drive-thru and delivery performance. The country has doubled its delivery sales mix to approximately 10% of sales. The company is witnessing an increase in delivery and digital transactions per restaurants. It witnessed continued improvement in results throughout the second quarter. As of Jun 30, 2020, most of the company’s restaurants are open globally.

McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new markets. The company’s expansion efforts continue to drive performance. Currently, it has more than 39,020 restaurants worldwide. Despite the coronavirus pandemic, the company opened about 150 restaurants through June. The company is also confident about the opening 400 new restaurants in China this year.

Moreover, with the roll-out of self-order kiosks, digital menu boards, table service, and the mobile app, customers are offered more choices and flexibility as the company progresses toward its Experience of the Future initiative, which is based on adding technology to its eateries. Notably, the converted restaurants are now witnessing even stronger financial results than those which have not yet made the switch.

Concerns

McDonald’s results in the coming quarters are likely to be impacted by the coronavirus outbreak. Although the company has reopened most of its restaurants, it is likely to witness dismal traffic due the social distancing protocols.

The company’s comps declined for the second straight quarter after reporting positive comps in the preceding 19 quarters. In the second quarter, global comps declined 23.9%, against a gain of 6.5% in the prior-year quarter. In first-quarter 2020, comps were down 3.4%.

A strong balance sheet will help the company tide over the ongoing crisis. At the end of Jun 30, 2020, the company’s long-term debt stands at $34.7 billion, compared with $38 billion as of Mar 31, 2020. Although debt has declined sequentially, it is still very high. Moreover, the company ended second-quarter 2020 with cash and cash equivalent of $3.3 billion, compared with $5.3 billion at the end of first-quarter 2020, which may not be enough to manage the high-debt level.

Zacks Rank & key Picks

McDonald’s currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Papa John's International, Inc. PZZA, Jack in the Box Inc. JACK and El Pollo Loco Holdings, Inc. LOCO. Papa John's sports a Zacks Rank #1, while Jack in the Box and El Pollo Loco carry a Zacks Rank #2 (Buy).

Papa John's has a three-five year earnings per share growth rate of 8%.

Jack in the Box’s 2021 earnings are expected to increase 17.7%.

El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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