McDonald's (MCD – Free McDonald’s Stock Report), one of the world's largest restaurant chains and a component of the Dow 30, has reported lackluster second-quarter results, causing the stock to fall moderately. Revenues of $6.916 billion were only nominally higher than the year-earlier figure of $6.905 billion. Moreover, earnings came in at $1.32 a share, $0.03 lower than the comparable 2011 tally. Although global comparable-store sales were respectable (up 3.7% in the period), overall results were hurt by a number of factors, the most notable of which was unfavorable foreign currency movements. When the U.S. dollar strengthens versus other currencies, foreign sales and earnings are worth less when converted into greenbacks. The effect was amplified by McDonald's large international presence. Indeed, sales would have increased 5% year to year on a constant currency basis. Moreover, foreign exchange shaved $0.07 a share from the company's June-quarter earnings. However, there were other factors keeping the fast-food chain’s earnings in check, such as global economic malaise and higher costs. To wit, both interest and SG&A expenses rose as a percentage of sales. A lower share count gave a boost to earnings, though this was partially offset by a higher tax rate.
In terms of geography, Europe and the United States turned in the best performances. Comparable-store sales climbed 3.8% on the Continent, thanks to strength in the United Kingdom, Russia, and to a lesser extent, France and Germany. Remodeled restaurants, everyday value options, and premium offerings helped drive sales, as well. On our shores, comps rose 3.6%, boosted by classic menu items and McCafe beverages. The company's value, convenience, and taste continued to resonate with diners in the United States. The region comprised of Asia/Pacific, the Middle East, and Africa was the relative laggard, posting same-store sales growth of 0.9%. Strength in Australia and China was offset by weakness in Japan.
Looking forward, we believe that the headwinds the company faced in the second quarter will continue to weigh on results in the back half of 2012. Management indicated that July comps would likely be positive, but not as strong as they were in the June interim. While we had tempered our full-year earnings forecast by a nickel, to $5.65 a share, after May comps were reported, our estimate now appears to have been optimistic. Due to the factors mentioned above (a sluggish global economy, a strong dollar, higher costs, etc.), we now look for McDonald's to earn $5.50 a share this year. If achieved, this would represent growth of roughly 4% from the year-earlier figure.
Despite the challenging operating environment, we continue to like MCD stock for conservative investors. Management's strategy of modernizing restaurants and expanding access to the McDonald's brand should serve it well going forward. Although capital appreciation potential is not head turning, it is more appealing on a risk-adjusted basis. Indeed, this stock garners top marks for Safety (1) and Price Stability (100). Moreover, strong cash flow and a solid balance sheet offer some downside protection, in our view, while an above-average dividend yield provides investors with a nice level of income.
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.