Earnings Preview: McDonald’s

Oak Brook, Illinois-based McDonald’s Corporation (MCD) is slated to release its fourth-quarter and fiscal 2010 results on January 24, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is $1.16 per share on revenue of $6.19 billion. For 2010, the Zacks Consensus Estimates of earnings and revenue are $4.60 and $24.1 billion, respectively.

With respect to earnings surprises, over the trailing four quarters, McDonald’s has outperformed the Zacks Consensus Estimate for all the four quarters in a range of 0.89% to 7.29%. The average earnings surprise was a positive 3.30%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

McDonald’s posted third-quarter 2010 earnings of $1.29 per share, beating the Zacks Consensus Estimate of $1.24. The third quarter earnings surged 12% from $1.15 per share reported in the prior-year quarter.

The results were driven by value offerings and premium products, and a rise in comparable-store sales across all regions.The company also benefited from its strategy to renovate restaurants and innovate new menu offerings, which drove higher traffic in the reported quarter.

McDonald’s, the world’s largest hamburger chain, said that revenues for the quarter climbed 4% to $6.3 billion, outperforming the Zacks Consensus Estimate of $6.2 billion.

Revenues from company-operated restaurants rose 4% to $4.2 billion while revenues from Franchise-operated restaurants jumped 5% to $2.1 billion. Total operating income grew 8% to $2.1 billion.

McDonald’s global comparable-restaurant sales continue to grow, while maintaining healthy margins on an expanding market share. Global comparable-store sales rose 6.0% during the quarter with the U.S. sales up 5.3%, Europe up 4.1% and Asia/Pacific, Middle East and Africa (APMEA) up 8.1%.


McDonald’s expects food cost to increase 1% to 2% year over year in the U.S and slightly in Europe in the fourth quarter of 2010. However, for full year 2010, the company expects commodity cost to be down year over year.

For 2011, McDonald’s forecasts commodity cost to jump 2% in the U.S and labor cost to rise moderately. In Europe, the company expects commodity costs to increase approximately 3%. Based on these inflation expectations, management noted it would need to achieve same-store sales of 2-3% to grow margins next year.

The company anticipates capital expenditure for 2010 to be approximately $2.3 billion. Nearly half the amount will be reinvested in existing restaurants, including the refurbishment of over 1,800 locations worldwide. The rest will primarily be used to open about 1,000 restaurants.

Estimates Revisions Trend

Estimates have not moved up significantly in the last 7 or 30 days for the to be reported quarter, implying that analysts expect the company to report in line results. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2010 reflect a year-over-year growth of 12.24% and 15.64% respectively. The Zacks Consensus Estimate for 2011 is $5.02, reflecting a year-over-year growth of 9.11%.

Agreement of Estimate Revisions

In the last 30 days, out of 23 analysts covering the stock, 2 analysts slashed their fourth quarter estimates. For 2010, 1 out of 24 analysts reduced his/her estimate. None of the analysts raised their estimates for the fourth quarter and 2010. Additionally, 3 out of the 25 analysts covering the stock have cut down their estimates for fiscal 2011 and 1 analyst has increased the estimate. This implies that the analysts are slightly skeptical regarding the upside in the estimates.

In the last 7 days, 1 analyst has decreased the estimate for the fourth quarter and fiscal year 2010. For 2011, 3 analysts have lowered their estimates. None of the analysts have made an upward revision to their forecasts for the to be reported quarter and year. However, one analyst has moved in the opposite direction for fiscal 2011.

Though analysts believe that revenues and margins will grow over the next few quarters through unit expansion and strong comps momentum, the profits are expected to be hurt in the reported quarter due to tough weather conditions and higher commodity cost. Moreover, McDonald’s remains prone to currency fluctuations, primarily related to the Euro, which denominates approximately 25% of its operating income.

In 2011, analysts believe wage and commodity inflation is likely. Moreover, the European economic environment will remain challenged as austerity measures are implemented.

Magnitude of Estimate Revisions

There has been no change in the last 60 days in the earnings estimate of $1.16 for the fourth quarter and $4.60 for fiscal 2010, as seen from the magnitude of the Consensus estimate trend. Therefore, the analysts expect the company to report in line. However, in the last 60 days, estimates for 2011 have inched up by 1 cent to $5.02.

The company reported global comparable-store sales growth of 6.5% in the month of October and 4.8% in November. However, we expect comps in the month of December to suffer due to adverse weather in the U.S. and Europe preventing customers from dining outside.

Our Take

Currently, we expect McDonald’s fourth quarter results to be in line with estimates, as the company continues to grow same-store sales while maintaining healthy margins and outperforming competitors.

We reiterate our long-term Neutral rating on McDonald’s. Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects being exposed to faster-growing international markets. Moreover, the franchising strategy that is predominant in McDonald’s business model helps drive steady cash flow streams, solid margins and returns.

We believe, in the coming quarter, the company will be able to grow the top line driven by unit expansion and strong comps momentum. However, stiff competition from other quick-service restaurant operators and macroeconomic factors influencing consumer spending patterns still remain concerns.

One of McDonald’s primary competitors, Yum! Brands Inc. (YUM), will announce its fourth quarter results on February 2, after the market closes.

MCDONALDS CORP (MCD): Free Stock Analysis Report

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