Investors put McDonald's back on the front burner

It wasn't an overnight transformation, but McDonald's has rebounded from soupy sluggishness to become the fast-food industry's comeback kid.

Yes, many investors who had invested in McDonald's (MCD) in 2013, and stayed in anticipation of great returns, suffered grim disappointment as the stock meandered through mid-2015 at around $100-$103 a share, at best. Technology stocks by then had become the market's gangbuster winners. Frustrated McDonald's investors surmised they had simply misjudged the trend. 

Wrong! By late 2015, when so many investors had given up on McDonald's as an investment, the stock perked up. It started to edge higher and eventually hit $120 a share by year-end 2015. Patience finally paid off for those who waited it out. And those who've stuck around to today are doing even better: The stock currently trades at $153 a share.

McDonald's market capitalization has leaped to $125 billion as flat earnings in the past three years started recovering, from $4.82 a share in 2014 to $5.44 in 2016. Currently, analysts expect per-share net income to jump to $6.39-$6.50, even as revenues continue to drop. Sales tumbled from $27.4 billion in 2014 to $25.4 billion in 2016. For 2017, analysts at CFRA Research expect "high-single- to low-double-digit declines in 2017 and 2018," in part due to the impact of refranchising initiatives and foreign currency headwinds.

Still, CFRA is maintaining its "buy" rating on shares of McDonald's. "And with some potentially encouraging fruits of an earlier strategic reorganization," it raised its 12-month price target by $15 a share, to $165 in 2017 (with a dividend yield of 2.4 percent). CFRA also raised its 2017 earnings estimate by 8 cents a share, to $6.39, and boosted its 2018 forecast by 17 cents a share, to $6.82.

"We anticipate further second-quarter strides after notably broad first-quarter gains in comparable sales across geographic regions," said Tuna Amobi, CFRA equity analyst. And looking ahead, "we see further sizable expansion of operating margins amid ongoing refranchising initiatives, noting McDonald's targeted global franchise mix of 95 percent in the next few years, up from 85 percent in the fourth quarter of 2016," said Amobi.

Jeff Farmer, senior analyst at Wells Fargo Securities, has a higher price target for McDonald's of $175 a share, up from $165, based partly on his 2018 earnings forecast that he raised, to $7.01 a share from $6.95. For 2017, he figures McDonald's will earn $6.50 a share.

Farmer pointed out in a recent report that the rollout of McDonald's new campaign called "Experience of the Future" "could drive a 1 percent U.S. same-store sales tailwind in 2018, growing to 2.5 percent in 2020." And in terms of earnings, he figured the program could "represent a 2.3 percent earnings-per-share growth tailwind in 2018, increasing to 4 percent in 2020."

The "Experience of the Future" initiative involves remodeling or upgrading how customers can order food beyond traditional counter service. It includes kiosks with digital touch-screens, new ways to pay and digital menu boards for drive-through customers.

"In an effort to accelerate same-store sales and traffic growth, McDonald's is focusing on digital engagements, delivery and expansion of the Experience of the Future program," said Peter Saleh, equity analyst at the research firm BTIG. "We believe McDonald's rapid implementation of mobile order and pay and in-restauarant kiosks will help drive meaningful sustained sales lifts, in addition to reduced front-of-the-house labor," he argued. The changes could generate, he added, a 5 percent to 6 percent same-store sales benefit, starting in 2018.

Saleh has a price target of $175 a share, based on applying a 25 times price-earnings multiple to his 2018 earnings estimate of $7.02 a share. He noted that McDonald's has committed to launch mobile order and pay in 20,000 restaurants globally as well as in all U.S. restaurants by the end of 2017.

Equally important, he said, McDonald's has accelerated efforts to upgrade its locations through remodels and deploy more customer-facing technology.

So McDonald's is now back on Wall Street's favored list of stocks, even as the tech names continue to attract most analysts and investors. But with McDonald's now in the thick of adopting the latest technology tools to accelerate sales and attract customers, the company has enhanced its image with tech-savvy customers -- and tech-crazy Wall Street.