In this segment of the Market Foolery podcast, host Mac Greer, Jason Moser of Million Dollar Portfolio, and David Kretzmann of Motley Fool Hidden Gems Canada quickly serve up their thoughts about the hot results McDonald's (NYSE: MCD) delivered for last quarter.
Thanks to aggressive promotional offers, new tech and new menu items, restaurant renovations, and even delivery, the fast-food giant beat expectations and kept itself on a growth path. Should investors put a Big Mac in their portfolios now? And how does the current situation at McDonald's speak to that of former market darling Chipotle Mexican Grill (NYSE: CMG)?
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A full transcript follows the video.
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This video was recorded on Jan. 30, 2018.
Mac Greer: Guys, let's talk some McDonald's. McDonald's reporting better than expected earnings. Jason, best same-store sales growth in six years thanks in part to Value promotions, new menu items, mobile ordering and delivery. What do you think?
Jason Moser: I'll tell you, Mac, this success is not due to me. I cannot remember the last time I went to McDonald's. With that said --
Greer: I love McDonald's.
Moser: -- I have to say, this has been one of the most fascinating turnarounds to see. I feel like, whenever we see a CEO out there that's really firing on all cylinders, as Ron Gross would like to say, we feel like saying, "That's the Steve Easterbrook of that company," or, "That's the Steve Easterbrook of that industry," because Steve Easterbrook is the CEO that really took McDonald's in the middle of this big downturn and turned that ship around completely. McDonald's has been one of the best turnarounds we've seen in quite some time. And I like the business in a sense that, you're focusing on food, that's a good repeat sales business. Fast food, the value proposition there. And really, the McDonald's story all boils down to being able to take this worldwide brand and modernizing it and really bringing it up with the times. And I think Easterbrook has done a very good job with that, focusing on things like mobile ordering and delivery and really, you mentioned this before, bringing the quality of those stores backup and making the experience a nicer one.
Greer: The renovated stores are really nice. We end up stopping at McDonald's a lot on road trips, and stopped at one a year ago, and I placed my order and went and sat at this table, and someone brought me my food. Table service! And it was a really nice store. And that changes the way that I feel about the whole company. I'm a shareholder, I should say, and I've been a shareholder for the last year. It's been a great stock.
Moser: It's a little bit of a lesson from Ron Shaich and Panera. I feel like he's played a big role in helping to reshape this food service industry that we're dealing with today. You have to be able to step up your game, or I think other players are going to go right past you. And with McDonald's, maybe not the biggest growth story in the world. But again, they're going to be returning somewhere in the neighborhood of $25 billion to shareholders through 2019. Share count is down about 20% since 2013. They'll continue to pay a dividend, and that dividend will continue to grow. So, while maybe there's not a big growth story there, I think this is a decent income play for investors looking to hang on to one that'll give you steady-eddy returns for some time, at least as long as Easterbrook is at the helm.
David Kretzmann: Yeah, I think this is another great lesson or case study that you don't want to necessarily extrapolate something that's happened in the last couple of years out for the next five years. A few years ago, fast food was really left for dead. Fast casual was the in thing. In the past couple of years, fast casual has struggled, sit down restaurants have struggled, but fast food has really been where the bulk of the growth has come with restaurants. I think these things will ebb and flow. It's not that one segment of restaurants is going to swallow the others, but there'll be ongoing innovation and give and take there. So, that's just something to keep in mind, especially when you have a brand and a company like McDonald's, which, even in their challenging days a few years ago were still producing solid free cash flow. It was really just a matter of getting that leadership and that strategic vision in place, and Steve Easterbrook has certainly delivered that.
And speaking of delivery there, they now have delivery rolled out in more than 10,000 restaurants globally. They mentioned that the average check size for delivery is one and a half to 2 times the average order size from non-delivery. So a lot of nice areas that they're innovating there, a really impressive story.
Moser: It's crazy to think about, probably three years ago, where we were looking at McDonald's and just thinking doom and gloom, and were looking at Chipotle and thinking, "This is the future." And now, today, well, well, well, how the turntables have ...
Greer: The turntables have turned. Something like that.
Kretzmann: Who knows.
Moser: That was my effort at it.
Kretzmann: Almost had it.
Greer: Well, at on point, you know, McDonald's had a stake in Chipotle. Maybe they, what, buy Chipotle back?
Moser: We've all, I think, lobbed that back and forth here around our desks at least at one point or another. And I think that would be the ultimate irony. I think, at some point or another, we end up seeing Chipotle go back private. I just feel like that's a concept that's probably going to do a little better out of the public markets, out of that scrutiny. But that would be an interesting opportunity for McDonald's to try to jump back in there and say, "Fool me once, shame on me -- " wait. [laughs]
Kretzmann: Well, that's an interesting thing with Chipotle. Looking at this McDonald's case study, it really was just a matter of getting that leadership in place. Chipotle this year is looking for a new CEO. If they can get someone like a Steve Easterbrook who can come in, recognize the strengths of the concept and then fine-tune it in certain areas, maybe in the next five years, Chipotle outperforms McDonald's.
Moser: I'm actually surprised they haven't named someone yet. It seems like it's been a while. I wonder if they're having difficulty finding someone that wants to take on that task or someone they feel like is suited for the role. It's kind of confounding to think we haven't really heard anything yet.
Greer: I'm telling you, my million-dollar idea for Chipotle, and this does violate the Food With Integrity, but Jason, we've talked about this -- at the end of the day, people just want a good burrito. They want a good meal. They don't sit there and say, "I'm really looking for something that has integrity." People don't think that way.
Moser: I absolutely agree.
Greer: So here's what I want. I want a guilty pleasures sub-menu at Chipotle. You have queso, you have other stuff that's not great for you, but you've already told me, guilty pleasure. Then, with the queso, you can bust out the Velveeta.
Moser: I was going to say, our queso is 100% Velveeta.
Greer: That's it! It's a guilty pleasure! But if you're going to go queso, it has to have the tasty taste, it can't be this horsey queso they rolled out before.
David Kretzmann owns shares of Chipotle Mexican Grill. Jason Moser owns shares of Chipotle Mexican Grill. Mac Greer owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.