North America

Earnings Preview: McDonald’s Q2 2017 (MCD)

By: Craig Bowles

Overview

McDonald’s Corp. (MCD) is slated to report 2Q 2017 earnings before the bell on Tuesday, July 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.

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 $1.62 (range $1.51 to $1.72). (Source: Yahoo! Finance)
  • Revenues: Consensus is for a y/y decline of -4.9% to $5.96 bln (range $5.69 bln to $6.29 bln).
  • Global Comparable Sales: Q1 was up 4% y/y.
  • U.S. Comparable Sales: Q4 was up 1.7% y/y. Annual comparisons are more difficult with last year’s improvement.
  • McDonald’s P/E at 27.2 compares to a five-year average of 19.7, P/Sales 5.3 vs 5-yr average of 3.7, P/Cash Flow 22.2 vs 5-yr average of 15.0. Dividend Yield of 2.4% compares to a 5-year average of 3.2%.
  • Analysts view McDonald’s with 22 (16 last qtr) Buy, 8 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 13,912 shares the last three months and 153,108 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 2.76%. . Options are pricing in an implied move of 2.23%.

Recent News

  • 06/26: Wells Fargo maintained an Outperform rating on McDonald’s following a review of the company’s “Experience of the Future’ rollout. Sees multiple initiatives to drive growth, as management plans to remodel stores, while launching a 200 Florida unit delivery pilot with UberEats that could expand to 2500 nationally, reflecting a potential 2-3% EPS growth tailwind, according to a post on StreetInsider.com.
  • 06/20: Cowen upgraded McDonald’s to Outperform from Market Perform on the belief that U.S. sales should sustain outperformance, largely through a sharper focus on value promotions and digital, according to a post on Barron’s.com.
  • 06/13: BofA Merrill Lynch maintained a Buy rating on McDonald’s and reiterated the stock as a top pick. 1.) Value: Aggressive value menu plans for early 2018. 2.) Unit economics: MCD is one of few restaurant companies that can attain better franchisee economics than peers on lower price points. 3.) Valuation: On a relative basis to other highly franchised restaurant stocks, MCD continues to screen cheap. We raise GAAP 2017E EPS to $6.60 (from $6.55) and 2018E to $6.85 (from $6.80), primarily due to FX offset by a higher share price used for repurchases. We raise our Price Objective to $175, or a 16x EV/EBITDA multiple (15.5x earlier) on FY’18E earnings (slightly below our multiples for POs for the peerset), according to a post on StreetInsider.com.
  • 06/08: Mizuho Securities initiated coverage on McDonald’s with a Buy rating and is encouraged by management’s increased willingness to challenge in stages, opting for progress over form. “After five years of playing defense in a fragmenting market, we believe they have figured out the right battle to fight.” With meaningful upgrades to product quality and service on the horizon, they expect that over the next three years, McDonald’s will recapture considerable traffic shares lost to competitors, according to a post on StreetInsider.com.

Technical Review

McDonald’s continues to make new all-time highs and now at $156.75 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. This is the second big move up since 2015, so it would be understandable if the stock formed a balance area for several months as the previous balance is around $119. (Chart courtesy of StockCharts.com)

Summary

McDonald’s CEO Easterbrook is now in his third year and has made noticeable customer experience improvements and personnel changes. CEO compensation has nearly doubled since 2015 but only a fraction is salary. Their employee training appears to be unmatched in the industry. Millennials and younger have been a demographic challenge but even that is improving. A lack of insider buying the past year is disappointing. The company beat analysts’ consensus by an average of 9c the past four quarters.  Estimize consensus for an EPS $1.65 on revenue of $6.003 bln compares to analyst consensus for an EPS $1.62 on revenue of $5.96 bln. Same-store sales growth comparisons are more difficult with last year’s improvement.

 

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