Will McDonald's stock keep on cooking?
McDonald's (MCD) stock isn't looking scrambled any longer.
The fast-food giant's stock has become a hot item since rolling out its all-day breakfast menu in October, with its shares up more than 30 percent since the start of that month. The S&P 500, by comparison, returned 7.4 percent during the same period.
The turnaround may be especially scrumptious to McDonald's investors given that the shares had languished during the previous three years, declining about 5 percent from 2012 through 2014, while the S&P 500 jumped 66 percent. The all-day breakfast menu helped bring more customers into its locations, although chief financial officer Kevin Ozan recently told investors that its revitalization stemmed from earlier changes to its menu and approach.
"We think about our momentum as really beginning before all day breakfast and then certainly getting accelerated by the introduction of all day breakfast," Ozan said at an investor meeting last month. "We focused on simplification, which, for us, is a broad area that includes menu simplification, operational simplification, replacement of drive-through menu boards, things to make it easier for our customers to order and get their food."
Restaurants around the country shaved their menus of between 7 to 10 items, Ozan said. Customers also responded to McDonald's pledge to use cage-free eggs and antibiotic-free chicken, with Ozan noting that "customers have higher expectations these days related to quality and ingredients in those food items." On top of that, the company pared underperforming restaurants and is introducing new technology like a digital ordering app.
The company's outperformance continued in 2016, with the stock rising more than 8 percent so far this year. During the first quarter, McDonald's was the 186th best performer among the S&P 500, according to FactSet. (The best performer during the first quarter was natural-resources company Freeport-McMoRan (FCX), whose shares jumped more than 52 percent during the period.)
That's all very well and good, but investors may want to know whether McDonald's stock will continue to sizzle. While there's no clear answer to that, some analysts believe that the all-day breakfast menu will continue to give the company a boost for a good chunk of time. In a February research note, JPMorgan analyst John Ivankoe wrote that McDonald's U.S. president Mike Andres told him that all-day breakfast will be a "sales driver for 18 to 36 months from the October 2015 launch."
The breakfast menu has had an usual impact on ordering, with Ozan noting that customers are using it as an add-on for meals.
"So believe it or not, you may find some people ordering a lunch entrée and ordering an Egg McMuffin sandwich as an add-on. And then we have some people that are trading up actually. What breakfast did for us is it filled a mid-tier price tier that we had a little gap in," Ozan said.
While that's helping boost sales -- the company's fourth-quarter same-store sales rose 5 percent globally -- there are some clouds lurking behind the yellow arches. For one, McDonald's is facing higher labor costs because of the push across many states and municipalities to boost the minimum wage. But an even bigger problem could emerge from a case now being heard by the National Labor Relations Board, which will decide whether McDonald's should be considered a joint employer of thousands of workers at its franchisees. That could result in higher labor costs for McDonald's, as well as make it liable for some allegations of labor law violations at some franchisees.
While Ozan didn't address the NLBR case, he did note that wages are one pressure the company will be dealing with for the foreseeable future. He noted, "I haven't seen where wage prices go down. So generally, they go up and may plateau for a little while, but they won't come down."