Is McDonald's Corporation (NYSE: MCD) Refranchising Model Working?

McDonald's Corporation (NYSE: MCD) announced an aggressive refranchising program in 2015 after the appointment of Steve Easterbrook as the company’s new CEO. Since the company set this audacious goal, the percentage of its franchised restaurants has risen from the low 80s to about 91% by end of this year.

Article Summary

McDonald’s launched its aggressive refranchising model in 2015.

The company operates in a countercyclical manner.

The company’s digital initiatives are the key to its future profitability.

Here’s the trading report on MCD.

The refranchising model currently being pursued by the company is aligned with the company’s overall vision as a real estate company that sells fast foods, which provide a way for its franchisees to pay their rent in form of fees. The implementation of the refranchising model is accompanied by an aggressive cost-cutting initiative where the company currently targets to reduce general and administrative costs by about $500 million.

An analysis of the company’s performance over the last 10 years reveals that it operates in a countercyclical manner given that it was able to weather the financial crisis and the following recession without major losses. The company also weathered the recent restaurant recession that took place between 2014 and 2015 where most restaurants witnessed declining comps.

The company’s stock has risen by about 52% from its 2016 lows, which has led some analysts to the conclusion that the stock is currently overvalued. However, the company’s overall strategy is quite solid and recent initiatives such as the launch of digital channels that allow customers to order and pay online are likely to drive the company’s future growth.

Restaurant chains such as Starbucks Corporation (NASDAQ: SBUX) and Domino's Pizza, Inc. (NYSE: DPZ) have implemented mobile order and pay as well as delivery services with impressive success. The implementation of the two initiatives by McDonald’s is likely to result in higher profitability given that the average value of delivered orders is much higher than that of in-store orders.

McDonald’s has a solid business model that can withstand numerous cycles and the refranchising efforts being implemented by the company are likely to generate higher profits for the company. The delivery and mobile order and pay models being implemented by the company are also likely to result in higher comps growth in future.

Finally, it seems like the refranchising model is working, but the company’s future growth lies in exploiting and adapting to the emerging trends in the fast-food industry.

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