North America

Earnings Preview: McDonald’s Q1 2017 (MCD)

By: Craig Bowles

Overview

McDonald’s Corp. (MCD) is slated to report 1Q 2017 earnings before the bell on Tuesday, April 25th. 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 $1.33 (range $1.25 to $1.39). (Source: Yahoo! Finance)
  • Revenues: Consensus is for a y/y decline of -6.6% to $5.51 bln (range $5.36 bln to $5.68 bln).
  • Global Comparable Sales: Q4 was up 2.7% y/y.
  • U.S. Comparable Sales: Q4 was -1.3% y/y. Annual comparisons are more difficult with last year’s improvement.
  • McDonald’s P/E at 24.4 compares to a five-year average of 19.7, P/Sales 4.6 vs 5-yr average of 3.7, P/Cash Flow 18.9 vs 5-yr average of 15.0. Dividend Yield of 2.8% compares to a 5-year average of 3.2%.
  • Analysts view McDonald’s with 16 (14 two qtrs. ago) Buy, 12 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 11,060 shares the last three months and 153,048 shares in the past year. (source: NASDAQ.com) McDonald’s ramped stock buybacks after 2013’s $2 bln to 2016’s $11 bln but plans to scale back again.
  • 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 2.41%. . Options are pricing in an implied move of 2.03%.

Recent News

  • 04/17: Wells Fargo upgraded McDonald’s to Outperform from Market Perform citing that changes should begin to pay off in a big way. Expect the 1,750 unit China transaction to close in 2Q17 and to drive a 920 bps increase in MCD’s EBITDA margin, according to a post on Barron’s.com.
  • 03/31: McDonald’s plans to switch from using frozen beef to fresh beef in Quarter Pounders by mid-2018. Credit Suisse expects a positive impact on same-store sales brand perception, according to a post on Barron’s.com.
  • 03/06: McDonald’s is issuing $2 billion in bonds with 5, 10 and 30 year issues maturities with the proceeds expected to fund its new capital program while scaling back buybacks compared to the past three years, according to a post on Barron’s.com.
  • 03/02: Credit Suisse reiterated an Outperform rating on McDonald’s after the company unveiled its new global growth plan at its investor day, doubling down on its core business of affordable fast food in an effort to win back customers who defected. Oppenheimer reiterated a Perform rating citing MCD’s difficult case for earnings upside, according to a post on Barron’s.com.
  • 01/28: Warren Buffett’s wife puts $2.61, $2.95, or $3.17 into a dashboard cup for him every day and his McDonald’s breakfast order depends on market direction each day, according to a post on Barron’s.com.

Technical Review

McDonald’s continues to make new all-time highs and now at $133.22 after having been flat from the end of 2011 through the summer of 2015, so the breakout from a multi-year range has been impressive. Point and figure charts show 2016 having built balance area support around $119. (Chart courtesy of StockCharts.com)

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Summary

McDonald’s CEO Easterbrook has made noticeable customer experience improvements in two years and changes continue on up to the executive level. Their employee training appears to be unmatched in the industry. Millennials and younger remain a demographic challenge, however. Prices appear to have increased with wages, so breakfast just went up 50c in the NYC area. A lack of insider buying the past year is disappointing. The company beat analysts’ consensus by an average of 8c the past four quarters.  Estimize consensus for an EPS $1.35 on revenue of $5.509 bln compares to analyst consensus for an EPS $1.33 on revenue of $5.51 bln. Same-store sales growth comparisons are more difficult with last year’s improvement.

 

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