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Earnings: McDonald’s, Coca-Cola, and Chipotle Report Q1 Tomorrow

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April 24, 2017
Kitchen Production Line
chipotle.com

Earnings season continues amidst a complicated international backdrop, but the recent round of French election results appeared to bring some relief to markets. It’s hard to say what the rest of the week holds, but that could provide some additional support for markets as companies continue to report. Next up in earnings is a food and beverage line up with McDonald’s (MCD),  the Coca-Cola Co. (KO) and Chipotle Mexican Grill (CMG) reporting Q1 tomorrow.

McDonald’s Q1 Earnings: A New Growth Plan

McDonald’s (MCD) unveiled its new global growth plan at the beginning of March, which emphasized elevating the customer experience through digital capabilities and the use of technology. Part of that plan includes launching mobile order and pay at 20,000 restaurants by the end of 2017. MCD has also been testing delivery as part of its new strategy. According to a company press release, it believes its “extraordinary footprint makes it uniquely positioned to become the global leader in delivery”.                              

The stock just hit an all-time high of $133.88 in Friday trading and closed just below it at $133.41. MCD is up about 9.5% year to date compared to just under a 5% increase for the S&P 500 (SPX).

For Q1, third-party consensus analyst estimates are earnings per share (EPS) of $1.32 on revenue of $5.47 billion, the lowest revenue expectation for the last 8 quarters. The options market has priced in just under a potential 2.0% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

There hasn’t been a lot of trading in the weekly Apr 28 options, but there was some activity in the 130 strike price for calls and puts. At the monthly May expiration, calls were active at the 135 strike price and puts have been active at the 125 strike. The implied volatility sits at the 46th percentile.

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.

Monthly beef prices have benefitted MCD

FIGURE 1: FALLING BEEF PRICES.

Lower beef prices in the past several years have helped MCD manage costs. The monthly U.S. $ per metric ton price of beef, shown on the thinkorswim® platform by TD AmeritradeSource: Federal Reserve's FRED database. For illustrative purposes only. Past performance does not guarantee future results.

Coca Cola Earnings: Trying to Adapt to Consumer Tastes

Soft drink consumption has declined in the United States as the public became aware of health risks associated with sugary drinks, according to Trefis research. Consumer tastes in developed countries are increasingly favoring healthier alternatives such as juices, teas, coffee, and water; even diet beverages haven’t escaped the criticism as concerns over artificial sweeteners have come to light, according to the same research. Despite declining volume consumption due to changing tastes in the United States and Europe, Trefis thinks soft drink consumption in emerging markets will catch up to developed market consumption.

KO is highly concentrated in the beverage business, more so than competitor PepsiCo (PEP) as illustrated by figure 2 below. To address some of these challenges, KO focused on adapting its business beyond soft drinks. In recent years, it expanded into the milk business and rolled out ready-to-drink coffees and teas under various brands. Growing sales in its water businesses, which make up just over 16% of the brand, have also helped offset declining soft drink sales, according to last quarter’s earnings press releases.

For Q1, KO management has said that they expect a net revenue headwind of 12 to 13% from acquisitions, divestitures and structural items, as well as a 3 to 4% currency headwind to income before taxes. Consensus third-party analyst estimates for earnings are $0.44 per share on revenue of $8.97 billion, the lowest revenue expectation for the company in the last 8 quarters.

The options market has priced in just under a potential 2.5% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. Short-term options trading has been active in calls at the 43 and 43.5 strike prices while puts have been active at the 41 strike. The implied volatility sits at the 39th percentile.

KO Business Divisions Compared to PEP

FIGURE 2: KO COMPARED TO PEP.

KO’s business (shown on the left) is primarily beverages, whereas more than half of PEP’s business (shown on the right) is food. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platformTrefis 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.

Chipotle Earnings: Time for a Turnaround?

Following a 2015 E. coli outbreak at its restaurants, CMG’s stock tumbled from all-time highs around $750 to lows close to $350 in late 2016. If stock price is any indication, investors appear to be optimistic the company’s turnaround efforts. CMG is up almost 27% in 2017 compared to a 4.91% return for the SPX. While there are potential signs of improvement, Maxim Group’s Stephen Anderson warns investors that “despite recent positives, we caution CMG’s share price may have gotten ahead of itself”.

What are some of the signs some analysts have said could be signaling an inflection point for the brand? Revenues declined 13.3% to $3.9 billion in 2016, but increased 3.7% to $1.0 billion in the fourth quarter of 2016. Comparable restaurant sales (the change in period-over-period sales for restaurants in operation for at least 13 full calendar months) decreased 20.4% in 2016, but increased 14.7% in December and the quarterly decline narrowed to 4.8%.

In Q1 2017, CMG is expected to report $1.28 EPS on revenue of $1.05 billion, according to consensus third-party analyst estimates. That’s a significant improvement compared to the same quarter last year when it reported a loss of $0.88 per share on revenue of $834 million.    

The options market priced in just under a potential 2.0% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. There typically isn’t a lot of options trading in CMG, but at the monthly May expiration there has been call activity at the 500 strike price, while put activity was spread across multiple strikes. The implied volatility sits at the 35th percentile.

CMG stock after E coli outbreak

FIGURE 3: COMING OFF LOWS.

CMG shares plummeted following the company’s 2015 E. coli outbreak and have substantially underperformed the SPX (purple line). 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.

As far as earnings goes, it’s busy week with major companies across sectors releasing results. Ford (F), General Motors (GM), Under Armour (UA), and MGM Resorts (MGM) could provide some insights into how consumers are spending.

Good Trading,
JJ
@TDAJJKinahan

NC