Short-term memory makes for long-term investing opportunity. At least that’s been McDonald’s (NYSE: MCD) narrative for the past two decades.
A few times over the past 20 years, the hamburger giant has conjured its inner schlimazel. It can’t seem to get out of its own way or do anything right. Sales and profits take a hit.
In the late 1990s, filthy restaurants and inept service had analysts panting that the golden arches would soon topple. To the detractors’ dismay, restaurants were sanitized and service improved. Share growth took flight.
A few years later, a menu that seemed as stale as a two-day-old Big Mac was supposed to be the great undoing. Again, failure … on the analysts’ part. The menu was overhauled, as was McDonald’s share price.
This time around, a more fearsome breed of burger slingers serve as bogeymen. As the naysayers tell it, Shake Shack (NYSE: SHAK) and Sonic (NASDAQ: SONC) are slated to eat McDonald’s lunch.
Even hidebound competitors Jack in the Box (NASDAQ: JACK) and Burger King Worldwide (NYSE: BKW) are supposed to make McDonald’s investors queasy, though I’m unsure why. The two times I’ve attempted to finish a Jack in the Box burger I was thwarted by unpalatable greasiness. And what’s Burger King’s latest push-the-envelope offering? Ten deep-fried hyper-processed chicken nuggets for $1.49 and a Canadian tax inversion. For that, Burger King gets a seat at McDonald’s table?
What’s always lost in the “this time it’s for real” polemic is McDonald’s stalwart corporate culture and long history of surmounting problems and developing quality management.
In the mid-2000s, McDonald’s had a succession of three CEOs in as many years. Due to illness and death, a new manager was called off the bench and elevated to the top post. Each time, the new CEO was able to step up and keep the company on track. And when a CEO fails to deliver, a new candidate is called to take the reins posthaste.
Former CEO Don Thompson “stepped down” from his post, effective March 1. Of course, “step down” is a euphemism for fired. McDonald’s culture demands performance, and Thompson failed to deliver.
Thompson might have succeeded if given more time, but he didn’t have time. 2014 was a disappointing year. Revenue had shrunk to $27.44 billion, which was less than revenue posted in each of the previous two years. EPS had dipped to $4.83, which was less than each of the previous three years. McDonald shares have traded flat to down for the past two years.
The good news is that Thompson’s replacement appears sufficiently talented to return McDonald’s to its former glory. Steve Easterbrook, the new CEO, is the former head of McDonald’s UK. He’s a mover who thrives on confronting the company’s adversaries.
At McDonald’s UK, Easterbrook dealt with the brand’s battered image head on. Under his direction, McDonald’s UK’s market share, after declining to 12% in 2006, rose each year to 15.7% in 2013.
As for the vaunted McDonald’s dividend? It’s as juicy as it has been in years, with a 3.5% yield. Forty years of dividend growth will not end this year, or next year, or the year after that. EPS continues to easily cover the payout.
To be sure, McDonald’s shares lag (hence the high dividend yield), but if history serves as a guide, the time to buy is not after Easterbrook has restored growth to the top and bottom lines. The time is now. At least, that’s been the narrative for the past 20 years.
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