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Earnings Preview: MCD, CMG, and KO Report This Week

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July 24, 2017
Burger and Fries
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It’s the height of earnings season and there’s a packed week full of results. Looking at food and beverage companies reporting second-quarter earnings, McDonald’s (MCD) reports on Tuesday before market open, Chipotle Mexican Grill (CMG) on Tuesday after market close, and Coca-Cola (KO) on Wednesday before market open. 

McDonald’s Earnings and Trading Activity

McDonald’s has been in the midst of adapting its strategy to meet changing consumer tastes. The big news of that strategy a while back was expanding to all-day breakfast. In addition to all-day breakfast, the company has taken additional steps such as announcing it will eliminate the use of frozen beef in most of its U.S. restaurants by next year, and move towards antibiotic-free chicken.

In addition to taking steps to adapt to consumers, the company has also been adapting its strategy through refranchising. In a plan announced a few years back, the company has continued to reduce the number of corporate-owned locations it operates. That move has resulted in a shift from restaurant revenues to fees, royalties, and rent generated by franchisees.

In other news, the company announced in May that it was expanding delivery to over 1,000 restaurants in partnership with UberEATS. The company has said it plans to continue to expand delivery to more restaurants, and said the company generated almost $1 billion in delivery sales last year across both company and franchise restaurants.

Turning to Q2 earnings, McDonald’s is expected to report earnings of $1.62 per share, up from $1.45 in the same period a year ago, on revenue of $6 billion according to third-party consensus analyst estimates. The stock has been bouncing around in a fairly tight range between about $148 and $157 since the start of June. It hit an all-time high of $156.75 on July 12, but has declined to the mid-$152 range leading up to earnings. 

Looking at options activity, traders have priced in around a 3% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading leading up to the earnings release at the July 28 expiration, calls have been active at the 160 strike price, while puts have been active at the 152.5 strike, right at the money. The implied volatility sits at the 78th 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.

McDonald's stock ytd performance charted on thinkorswim platform

FIGURE 1: A STRONG START TO THE YEAR.

McDonald’s (MCD) has been outperforming the S&P 500 (SPX) by a wide margin in 2017. The stock is up 28.67% year-to-date compared to just over a 9% increase in the SPX. 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.

Chipotle Mexican Grill Earnings and Trading Activity

Chipotle recently got hit with some bad news as more reports of food-related illnesses started popping up in recent weeks. The company made the decision to close one of its Virginia locations after a small number of illnesses were reported specific to that location. The news comes as the company has already been in the midst of recovering from similar food-related illness problems in 2015.

The stock dropped sharply following the news, and the company’s plans on how they will address food sourcing and sanitation is likely to be a big focus on their earnings call. For the second quarter, Chipotle is expected to report earnings of $2.17 per share, up from $0.87 in Q2 2016, on revenue of $1.18 billion according to third-party consensus analyst estimates.

Options traders have priced in around a 6% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator. In short-term options trading leading up to the earnings release at the July 28 expiration, there’s been a mixture of activity in calls, while puts have been active at the 300 strike. The implied volatility sits at the 100th percentile. 

Chipotle stock ytd performance charted on thinkorswim platform

FIGURE 2: RECENT TROUBLES.

Chipotle Mexican Grill (CMG) suffered a big drop in recent weeks as new cases of food poisoning at the company’s restaurants were reported. 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.

Coca-Cola Earnings and Trading Activity

Like McDonald’s, Coca-Cola has indicated that it has also been taking steps to adapt to changing consumer tastes. Revenues at the beverage giant have declined in the last eight quarters, largely due to weakness in its sparkling beverage category (Coca-Cola, Diet Coke, etc.) One way the company has adapted to changing tastes is by expanding its Dasani and Other Waters business, which has become a much larger portion of the company’s business in recent years (figure 3 below).

On top of making product changes, the company has been focused on cost-cutting and restructuring initiatives. The company has reported that it is currently working on refranchising all of its U.S. bottling territories by the end of 2017, which the company has said helps create “economically aligned bottling partners that have the capability to serve major customers, coupled with the ability to maintain strong, local ties across diverse markets.”

On top of refranchising its North American bottling operations, the company announced in April that it will lay off 1,200 people, and expand its cost-savings program to $3.8 billion. That announcement came amid the CEO transition from Muhtar Kent to James Quincy, and this will be the first quarter of results reported with Quincy at the helm.

Looking at Q2 earnings, Coca-Cola is expected to report earnings of $0.57 per share, down slightly from $0.60 in Q2 2016, on revenue of $9.75 billion according to third-party consensus analyst estimates.

Options traders have priced in around a 2% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator. In short-term options trading leading up to the earnings release at the July 28 expiration, calls have been active at the 45.5 and 46 strike prices and puts have been active at the 42 strike. The implied volatility sits at the 45th percentile. 

Coca-Cola company profile charted on the thinkorswim platform

FIGURE 3: COCA-COLA COMPANY PROFILE.

Coca-Cola’s Dasani and Other Waters division has been growing and becoming a larger focus for the company as consumers look to moderate the amount of sugar they consume. The Company Profile tool on the Fundamentals tab on the thinkorswim® platform allows TD Ameritrade clients to analyze potential revenue drivers of a stock. 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

It’s a heavy week full of earnings releases with major companies across sectors reporting. After Alphabet (GOOG, GOOGL) takes the stage today, Amazon (AMZN), Facebook (FB) and Twitter (TWTR) also report later in the week.

Good Trading,
JJ
@TDAJJKinahan

NC
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