North America

Earnings Preview: McDonald’s Corp. Q4 2016 (MCD)

By: Craig Bowles

Overview

McDonald’s Corp. (MCD) is slated to report 4Q 2016 earnings before the bell on Monday, January 23rd. The earnings release is expected at approximately 8:00 a.m. ET with a conference call to follow at 11:00 a.m. that is webcast through McDonald’s Investor Relations. A member of the Dow Jones Industrial Average, McDonald’s has significant market influence and the potential to impact the broader market gauges.

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Outliers & Strategy

Key measures:

  • Earnings per Share (EPS): McDonald’s typically reports a “clean” number that is normally comparable to consensus estimates. Verbiage is used when needed in the case items. The Street estimate is $1.41 (range $1.36 to $1.48). (Source: Yahoo! Finance)
  • Revenues: Consensus is for a y/y decline of -5.4% to $6.00 bln (range $5.81 bln to $6.22 bln).
  • Global Comparable Sales: Q3 was up 3.5% y/y.
  • U.S. Comparable Sales: Q4 consensus is -1.6%. Q3 was up 5.7% y/y. Annual comparisons become more difficult with last year’s improvement.
  • McDonald’s P/E at 22.8 compares to a five-year average of 19.7, P/Sales 4.3 vs 5-yr average of 3.7, P/Cash Flow 16.2 vs 5-yr average of 15.0. Dividend Yield of 3.0% compares to a 5-year average of 3.2%.
  • Analysts view McDonald’s with 15 (14 last qtr) Buy, 15 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insiders have sold 39,697 shares the last three months and 260,516 shares in the past year. (source:  NASDAQ.com) McDonald’s ramped up stock buyback from $2 billion in 2012 and 2013 to 2016’s $11 billion.
  • McDonald’s is the first of the major restaurant companies to report quarterly results and could impact the likes of Yum! Brands (YUM), Darden Restaurants (DRI), Sonic (SONC), Wendy’s (WEN), Restaurant Brands International (QSR) (owner of Burger King) and Starbucks (SBUX).
  • McDonald’s shares have a 1-day average price change on earnings of 2.70%. . Options are pricing in an implied move of 1.37%.

Recent News

  • 01/09: McDonald’s sold 80% of Its China operations for $2.1 billion, according to a post on Barron’s.com.
  • 12/20: Credit Suisse maintains an Outperform rating and raised their Q4 2016 U.S. SSS growth to 0% from -2% vs consensus of -1.6% and also their Q1 2017 SSS growth estimate to 0% from -2%. They raised the Q4 EPS estimate by 2c to $1.42 citing the improving product pipeline after channel checks and discussions with franchisees, according to a post on Barron’s.com.
  • 12/05: Instinet upgraded McDonald’s to Buy from Neutral citing a number of potential growth drivers including further menu innovation and a likely national rollout of its new mobile order-and-pay, according to a post on Barron’s.com.
  • 11/30: Credit Suisse removed McDonald’s from their Focus List on the belief that consensus is still under-modeling labor costs for 2017-2018, according to a post on Barron’s.com.
  • 10/24: Independent bond research firm Gimme Credit keeps an Underperform rating on McDonald’s bonds noting that U.S. sales growth comparisons will get tougher as it has now been just over a year since all-day breakfast was introduced. Also, the company benefited from margin expansion due to lower commodity prices and some price increases, according to a post on Barron’s.com.

Technical Review

McDonald’s made an all-time high of $131.96 in May 2016 after having been flat from the end of 2011 through the summer of 2015, so the breakout from a multi-year range was impressive. Point and figure technicians have a bearish price objective of $93. (Chart courtesy of StockCharts.com)

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Summary

McDonald’s new CEO has made noticeable customer experience improvements in the last twelve months and changes continue on up to the executive level. A lack of insider buying the past year is disappointing. Before last quarter’s 14c beat, the previous three quarters beat analysts’ consensus by an average of 7c.  Estimize consensus for an EPS $1.46 on revenue of $6.061 bln compares to analyst consensus for an EPS $1.41 on revenue of $6.00 bln. Same-store sales growth for Q4 is expected to soften.

 

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