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Dow-30 Earnings: McDonald’s Corporation - Third Quarter 2013
Shares of McDonald's (MCD – Free McDonald’s Stock Report) fell slightly after the restaurant operator and Dow-30 component reported third-quarter results. Headline numbers were actually a bit better than we had expected, but investors appeared to take issue with other aspects of the release, including sales figures. Revenues climbed 2% from a year earlier, to $7.323 billion, just ahead of our $7.300 billion forecast (others on Wall Street had been looking for something closer to $7.340 billion, however). Likewise, earnings per share moved higher by 6% year over year, to $1.52, just a penny higher than our call.
The respectable results were achieved against a macroeconomic backdrop that remained challenging. Growth in Asia is slowing, while consumers in the United States and Europe continue to keep a close eye on their spending. Global comparable-store sales rose 0.7% in July and 1.9% in August, helping comps advance 0.9% for the whole of the third quarter, versus a 1.9% gain in the same period last year. The consensus forecast had been for a 1.0% gain in third-quarter comps.
Earnings were hurt by a mix of headwinds and tailwinds. On the positive side, lower SG&A and company-operated restaurant expenses as a percentage of sales helped to drive a 103-basis-point improvement in the operating margin from a year earlier. A lower share count also aided the bottom line. On the other hand, the tax rate rose 58 basis points year over year, and unfavorable currency movements shaved about $0.01 a share from earnings.
Breaking things down by geography, the United States was the top performer, and same-store sales rose 0.7% on our shores. The top line was driven by classic menu items, the Monopoly promotion, and the introduction of Mighty Wings. In Europe, comps were up 0.2%, as solid results in the United Kingdom, Russia, and France were partially offset by some softness in Germany. The region comprised of Asia/Pacific, the Middle East, and Africa was the weak link, with comps down 1.4% in the interim, reflecting softness in major markets such as China, Japan, and Australia.
Going forward, we expect to see more of the same in the near term. The operating environment is apt to remain challenging, due to the factors noted above, as well as increased competition from rivals such as Wendy's and Burger King, minimal pricing power, and a mix shift toward less profitable menu items. Indeed, our near-term outlook hasn't changed much since our last full-page report went to press in late August. October comparable-store sales will likely be relatively flat, and up slightly for the whole of the fourth quarter. Our full-year 2013 earnings call remains steady at $5.60 a share, which would represent a 4% year-to-year gain.
Overall, we think these shares have appeal for conservative accounts with a focus on current income. True, the near-term operating environment will probably remain challenging, but management has done a good job of navigating these waters, in our view, a trend that should continue. Longer term, we believe that the company's strategy of improving the menu, modernizing restaurants, and expanding accessibility to the McDonald's brand will keep earnings moving ahead at a solid, mid-single-digit pace out to 2016-2018. Momentum investors can probably find more exciting options elsewhere, but this stock's above-average dividend yield (and well covered payments), below market Beta, and top marks for Safety and Price Stability make it a solid, if unglamorous, choice for risk-conscious investors.
About The Company:McDonald's is a quick service restaurant with 34,480 locations in 119 countries (as of December 31, 2012). 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.