McDonald’s Profits Were McLight and the Street’s Not Liking It

McDonald’s (NYSE:MCD) reported second quarter results, and sales, unlike their menu, were a little lean. The world’s largest hamburger chain saw earnings come in at $.98 which is what analysts were expecting. These earnings results were hampered by a nine cent currency exchange charge. Revenue of $5.65 billion fell shy of projections and showed a decline of 7% from a year ago. All important metric of same store sales were actually higher though not quite as good as analysts had hoped, rising 4.8% globally and 3.5% in the U.S. If you are like me, you are wondering how do same store sales rise when the overall sales trended down. Same store sales do not take into account currency effects, while overall revenue is denominated in dollars. So, sales growth overseas was still fairly strong, but the stronger dollar meant that McDonald’s is not getting as much bang for their buck.

The market has sent MCD stock down more than 5% in afternoon trading while the market indexes are strongly higher, reflecting the fact that the market was disappointed by the results. The strengthening dollar was not a surprise to anyone, but analysts had hoped that the continued global recession would drive even more sales towards McDonald’s. In fact, in April the company said that it was expecting to take somewhere around an 11 cent charge related to currency, but the actual charge was slightly better at just 9 cents. The slightly worse than expected same store sales growth numbers are more likely the reason for the stock’s sell-off.

Aside from continuing McDonald’s international growth strategy, there are quite a few new menu items at McDonald’s that the company has high hopes for. The hamburger chain has made a push into premium coffee, which rolled out successfully last quarter. This offering should help the company gain an even greater share of the breakfast market. Furthermore, they focused a bit of time on their new premium Angus burger on the earnings conference call with analysts. McDonald’s hopes that the $4 burger will increase average ticket amount and fill a gap in their menu. While the timing is not optimal for release of this product, the response from consumers has been positive.

At Ockham, we are confident in affirming our Fairly Valued rating on McDonald’s at this time. The stock sold for a reasonable forward looking earnings multiple of about 15x coming into the day. McDonald’s stock has been buffeted from the economic downturn to a large extent because it benefited from consumers “trade down” behavior. MCD is only down 2% over the last year, coming into the day, outpacing the S&P by more than 25%. By our methodology, McDonald’s is priced just about where it should be based on the fundamentals of cash earnings, revenue, sales growth, ROE, and dividends.

“You’re drinking a Mclatte probably as we speak. Is this a buying opportunity here? And to Patty’s point and some of the other folks out there, you know, you’re talking about beta plays right now. And McDonald’s has certainly been a play where it’s been based upon a weaker consumer and folks may be trading down a little bit. I still go back to what we’ve been talking about for a long time, the explosive growth potential they’ve got…” CNBC’s Power Lunch 7/23/2009

McDonald’s: Revenues Were McLight and The Street’s Not Loving It

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1 Comment on McDonald’s Profits Were McLight and the Street’s Not Liking It

  1. it’s about time their revenue went down! Maybe if they actually served edible food their profits would be better. People are starting to understand that what they put in their bodies at McDonald’s is utterly terrible for your health. Check out this new campaign against the corporate abuse of food called Value [the] Meal. It’s by an organization in Boston called Corporate Accountability International.

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