Earnings Preview: McDonald’s (MCD)

A leading fast food chain company, McDonald’s Corporation (MCD) is slated to release its second-quarter 2010 results on Friday, July 23. The current Zacks Consensus Estimate for the second quarter is $1.12 per share, representing an annualized growth of 15.4%.

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 short range of positive 0.98% to 7.29%. The average earnings surprise was a positive 3.23%. 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 robust first-quarter 2010 results, driven by value offerings and premium products, and rise in comparable-store sales across all regions.

Quarterly earnings of $1.03 per share excluding one-time items, outpaced the Zacks Consensus Estimate of $0.96, and surged 24% from $0.83 posted in the prior-year quarter.

McDonald’s said that revenues for the quarter climbed 10% to $5,610.1 million; and increased 4% in constant currencies, reflecting comparable-store sales growth and expansion, partially offset by the impact of the refranchising strategy in certain major markets.

McDonald’s global comparable-store sales continue to grow, while maintaining healthy margins on expanding market share. Global comparable-store sales rose 4.2% during the quarter with the U.S. sales up 1.5%, Europe up 5.2%, Asia/Pacific, Middle East and Africa (APMEA) up 5.7% and Other Countries & Corporate (operations in Canada and Latin America, as well as Corporate activities) up 12.3%.

Total company-operated restaurant margins for the quarter expanded 200 basis points to 18.2%. Restaurant margins increased 210 basis points to 20.4% in the U.S., 200 basis points to 17.3% in Europe, 220 basis points to 18% in APMEA and 370 basis points to 15.9% in Other Countries & Corporate.

The company ended first quarter 2010 with cash and cash equivalents of $930 million, total long-term debt of $10,482.6 million and shareholders’ equity of $14,116.8 million.


For fiscal 2010, the company expects net restaurant additions to add nearly 2% to System-wide sales growth (in constant currencies), most of which will be due to the net 609 traditional restaurants added in 2009. McDonald’s expects cost of goods to decrease 2-3% in U.S. and decrease slightly in Europe for fiscal 2010.

McDonald’s forecasts that the unfavorable euro rate will negatively impact the net income per share for fiscal 2010, even though the currency impact in the second quarter is expected to be minimal or nil.

The company anticipates capital expenditure for 2010 to be approximately $2.4 billion. Nearly, half of the amount will be reinvested in existing restaurants, including the re-imaging of over 2,000 locations worldwide. The rest will primarily be used to open about 1,000 restaurants.

Estimates Revisions Trend

Estimates have moved up in the last 7 and 30 days, implying that the analysts do see a meaningful catalyst for the time being. The current Zacks Consensus Estimate is $4.49 for 2010, reflecting a year-over-year growth of 12.73% and $4.86 for 2011, reflecting a year-over-year growth of 8.21%.

Agreement of Estimate Revisions

In the last 30 days, out of 21 analysts covering the stock, 2 analysts raised their second quarter estimates and one analyst has reduced his estimates. Additionally, 4 out of the 22 analysts covering the stock have raised their estimates for full fiscal 2010. None of the analysts have made a downward revision to their forecasts. The analysts have raised their estimates as comparable-store sales jumped 4.9% in the month of April and 4.8% in the month of May, helped by growth in all three operating regions. However one analyst has decreased his estimates based on the negative impact of the euro.

For fiscal 2011, 2 out of the 23 analysts covering the stock have raised their estimates and 2 have reduced their estimates, thus providing no directional movement.

Magnitude of Estimate Revisions

There has been no change in the last 60 days in the earnings estimate of $1.12 for the second quarter as seen from the magnitude of the Consensus estimate trend. Therefore, the analysts expect the company to report in line.

Following the first-quarter earnings release, earnings estimates for 2010 and 2011 improved to $4.52 and $4.92 respectively from the previous estimate of $4.43 and $4.84 respectively. The analysts have based the upward revision on strong first quarter results, improving traffic trends, increased contribution from new menu offerings and uptrend across its domestic and international markets.

Additionally, during the past 30 days earnings estimate for 2010 and 2011 increased to $4.48 and $4.86 respectively, and is now expected at $4.49 for2 010 and $4.86 for 2011. The analysts have further raised the estimates as the company reported strong same store sales growth in the months of April and May, particularly in the international market and expects the company to gain market share based on product innovation and marketing strength.

Our Take

Currently, we expect McDonald’s second quarter results to beat estimates, as the company continues to grow same-store sales while maintaining healthy margins and outperforming competitors. McDonald’s is also shutting down its non-performing restaurants to drive margins.

We have a 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. However, stiff competition from other quick-service restaurant operators and negative impact of the euro are adversely affecting its operating margins and profits. Macro-economic factors influencing consumer spending patterns still remain concerns.

One of McDonald’s primary competitors, Yum!’s Brand Inc. (YUM) reported its second quarter 2010 earnings of 58 cents per share on July 13, which surpassed the Zacks Consensus Estimate of 54 cents. The earnings increased 17% year over year mainly on the back of strong performances in its China division.

MCDONALDS CORP (MCD): Free Stock Analysis Report
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