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In April, McDonald's (MCD) added a new item to its menu -- the McComeback.
The world's largest fast food company has pledged to improve quality, efficiency and customer satisfaction. It has already begun a cost-cutting initiative and has added premium salads and new breakfast sandwiches to its product line.
Last week it announced that quarterly sales increased 11%, and that U.S. same-store sales rose 5%, reversing a yearlong sales spiral. The stock jumped 8% on the news Friday.
But that's small potatoes for the fastfood icon, which has seen its stock price steadily fall since 1999. And with more than 31,000 restaurants in 120 countries, McDonald's has fewer frontiers to conquer. It won't be easy for the expansion-oriented restaurant to increase profitability from existing stores, says Morningstar analyst Carl Sibilski. Operational problems remain in the kitchen and at the counter, and the chain is hurting globally. Overseas same-store sales have fallen for 22 straight months, hurt by cases of mad cow disease and increasing competition.
Within the past five months, six brokerages have seen potential in the company's plans and have upgraded the stock -- but only half of the 17 analysts covering McDonald's suggest that now is a good time to buy. "It'll take a lot of time for this restaurant giant to clean up its store image and improve customer service," says Sibilski.
McDonalds' earnings are expected to remain at or near their current levels this year as the company implements more turnaround strategies. Analysts expect earnings to grow about 8% over the next three to five years, compared with a 13% growth rate for the overall industry.
And when comparing price-to-earnings ratios, McDonald's looks expensive next to its rivals Wendy's International (WEN) and Yum! Brands (YUM). Investors might want to wait for more positive news before buying a piece of the golden arches.
--Erin Burt
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