McDonald’s Earnings Preview: What Might Be In Store?

Refranchising initiative, value menu promotion among potential topics when MCD releases Q4 earnings before the bell Tuesday.

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Investors could get a better picture of how well McDonald’s Corp.’s (MCD) new “$1 $2 $3 Menu” promotion has been performing when the hamburger giant opens its fourth-quarter books before the bell Tuesday.

Some franchisees have said they’ve been concerned about the promotion’s long-term impact on sales, according to published reports. But in the third quarter, MCD marked its ninth straight quarter of higher comparable sales, an industry measure used to compare sales at stores open longer than a year. Global comparable sales were up 6% and U.S. same-store sales were higher by 4.1% for the quarter, the company said.

Revenues have declined during that same period, which MCD said was mostly tied to its strategic refranchising initiative that moves company-owned stores to franchisees. In the third quarter, MCD said it had upped the percentage of franchised restaurants to 91% from 81%, with franchise margins comprising more than 80% of total restaurant margin dollars going forward.

“Our refranchising activity will have a dilutive impact on our revenue, operating income and EPS growth rates in the near term, making year-over-year comparisons through 2018 choppy,” Kevin Ozan, MCD chief financial officers, said on the conference call.

MCD executives also said on the conference call that they expected the partnership with UberEATS to offer delivery in 5,000 restaurants by the end of the year. Were they on track? And what about MCD’s rollout of the mobile order and curbside check-in option, which executives said was expected to reach all 14,000 U.S. restaurants by the end of the year?

In the third quarter, MCD reported earnings of $1.76 a share, outpacing Wall Street’s forecasts by a penny. Revenues fell to $5.75 from $6.42 billion, but missed Wall Street’s expectations of $5.79 billion. For the fourth quarter, the consensus earnings estimate from third-party Wall Street analysts is $1.59 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. That’s higher than last year’s earnings of $1.43 a share. Revenue is projected to fall to $5.26 billion from $6.03 billion a year ago.

MCD shares, 12m, 2017-18

FIGURE 1: A ROUGH RIDE HIGHER.

Shares of MCD looked stuck in a tight $150-$155 trading range throughout much of the summer and into the fall before breaking out to the upside in early October. Since then, it’s added better than 14% in value and is up nearly 45% on the year. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Option Trading Activity

The options market has priced in an expected share price move of 2.6% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 185 strike while put activity has been concentrated at the 175 strike. The implied volatility sits at the 90th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

MCD Company Snapshot 2018

FIGURE 2: U.S. STORE POWER.

MCD’s U.S.-based restaurants have long led the company’s sales and earnings. Some analysts expect MCD’s U.S.-based stores to produce more revenue as the number of franchised restaurants grow. Chart source: thinkorswim® by TD Ameritrade.  Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

The market is in the midst of earnings season and this is expected to be a big week with earnings reports scheduled for Dow Jones Industrials’ components Apple (AAPL), Boeing (BA), Chevron (CVX), ExxonMobile (XOM). Earnings reports are also on tap from Microsoft (MSFT), Amazon (AMZN) and Alibaba (BABA). 

Good Trading,
JJ
@TDAJJKinahan

* Earnings data/research is provided by unaffiliated third parties.

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