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Dow-30 Earnings: McDonald’s Corporation - First Quarter 2012
McDonald's (MCD – Free McDonald’s Stock Report), arguably the world's most iconic restaurant, has reported first-quarter financial data. Results were solid, overall, and generally in line with our estimates. To wit, revenues of $6.55 billion were directly on par with our forecast and up 7%, year over year. Earnings of $1.23 a share were $0.02 below our call, but marked a 7% advance from the year-earlier period. One of the most impressive figures from the March term was the global comparable-store sales increase of 7.3%, which was better than we anticipated. Meanwhile, management indicated that April comps would likely rise about 4%. Investors were pleased with the company's results, and the stock rose in morning trading following the release.
McDonald's remains focused on its priorities of evolving the menu, improving the customer experience, and expanding access to its brand. Its efforts appear to be paying off. During the first quarter, the United States was the restaurant's top-performing geographic region, and same-store sales rose 8.9% on our shores. Classic menu items continued to be popular, augmented by new offerings like Chicken McBites. Reimaged, modernized locations also helped lure diners, while mild winter weather got people outside and into the company's restaurants. Comps climbed 5.5% in the segment comprised of Asia/Pacific, the Middle East, and Africa, with China, Australia, and Japan leading the charge. Europe was the relative laggard in the quarter, with comps rising 5.0% on the Continent. Ongoing sovereign-debt issues and economic weakness among some euro zone members weighed on results, as did severe weather in February. Turning to profitability, margins were relatively flat, year over year, and operating expenses as a percentage of the top line fell 13 basis points. Fixed-cost leverage from strong comparable-store sales was largely offset by higher operating costs (food, labor, etc.). Interest expense ticked up slightly, as did the tax rate, but net income rose 5%, while a lower share count aided the bottom line.
Looking ahead, we are maintaining our 2012 earnings estimate of $5.75 a share on revenues of $28.4 billion. An expanded menu and McCafe drinks should continue to lure diners for snacks and during non-peak meal times, while classic meals, value, and convenience ought to keep the breakfast, lunch, and dinner crowds satisfied. New restaurants (particularly in overseas markets) and remodeled locations will likely help drive sales, as well. That said, top- and bottom-line headwinds exist, such as unfavorable currency movements and economic uncertainty, especially in Europe. Commodity-cost inflation (4.5% to 5.5% in the United States and 2.5% to 3.5% in Europe), increased interest expenses, and a higher tax rate are all expected to weigh on earnings growth this year, partially offset by a lower share count. All told, we continue to think these high-quality shares are a solid core holding for conservative, income-oriented investors.
About The Company: McDonald's is a quick service restaurant with more than 33,500 locations in 119 countries (as of December 31, 2011). The majority of the restaurants (over 80%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.