McDonald’s Corporation (MCD) is scheduled to report its fourth-quarter results before market open on Monday. However, taking a closer look at MCD earnings from last quarter reveals some question marks that McDonald’s stock investors should be aware of heading into Monday’s Q4 release.
According to Estimize, Wall Street analysts are expecting McDonald’s to earn $1.22 per share on revenue of $6.236 billion.
McDonald’s stock moved sharply higher following the release of its third-quarter results on Oct. 22. The company earned $1.40 per share on revenue of $6.62 billion — handily beating Wall Street’s expectations by 12 cents per share and $210 million, respectively.
McDonald’s proved in its Q3 that its turnaround initiatives are in full force. In fact, McDonald’s stock’s outperformance over the past three, six and 12 months prove the company is far from “broken.”
The question investors are asking is this: Has McDonald’s momentum continued in the fourth quarter?
MCD’s International Concerns: China, Russia
McDonald’s noted in its third-quarter results that same-store sales rose 26.8% in China compared to just a 0.9% same-store increase in the U.S. China’s recovery year-over-year helped contribute meaningfully to MCD’s overall profit in the quarter as the country accounts for the majority of company-operated restaurant margin gains.
McDonald’s also noted a strong performance in Russia, and the two countries combined for what the company described as “two high growth markets.”
Since McDonald’s last reported its results, China’s economy has experienced some of its worst turbulence in years. The country’s stock markets shed billions of dollars of value and the country’s GDP grew at its slowest pace since 1990 in the fourth quarter. Meanwhile, Russia’s currency, the rubble, finished 2015 near its weakest yearly point — placing additional pressure on MCD margins.
MCD’s Domestic Concerns: Sector-Wide Traffic Concerns, All-Day Breakfast Menu
McDonald’s domestic same-store sales were positive during the third quarter for the first time since the third quarter 2013. However, operating income for the quarter fell 1% at a time when the company is losing market share.
Meanwhile, McDonald’s continues shedding market share in the domestic market, and Wall Street analysts are quick to point this out. For example, Nomura’s Mark Kalinowski believes that Chick-Fil-A poses a long-term threat to McDonald’s as the private chicken fast food chain continues to expand to new markets.
According to Black Box Intelligence, a restaurant and service analytics agency, the restaurant sector as a whole “crawled to the finish line” with a “small” same-store sales growth of 0.4% during the fourth quarter. The meager results represents a 1.2%drop from the third quarter and also marks the lowest sales growth rate since the third quarter of 2014.
This fact should certainly alarm short-term McDonald’s traders, or at the very least attract their attention to disappointing industry wide trends.
Finally, McDonald’s sales were boosted in the third quarter partially due to the national roll-out of the all-day breakfast menu. By Easterbrook’s own admission, and as logic would dictate, the “fad” and initial popularity of the initiative needs to cool down.
Speaking to analysts following McDonald’s third-quarter print, Easterbrook said that enthusiasm for the all-day breakfast menu is “starting higher as you would expect out the box than what we would expect our steady run-rate to be when things settle down.”
McDonald’s Stock Lacks Catalysts
MCD confirmed in the end of 2015 that it will not pursue a real estate investment trust model. The company also exceeded many investor expectations with $10 billion upside in its share buyback program and detailed SG&A savings initiatives that are for the most part weighted toward 2017.
McDonald’s stock is trading near its 52-week highs, which implies investors are setting a high bar for a spectacular Q4 earnings report and an in-line performance is unlikely to satisfy investor appetite.
There are too many ongoing concerns and question marks for short-term investors. However, longer-term investors that can tolerate short term volatility have made a wise choice investing in McDonald’s stocks as management holds a long-term vision in reinvigorating both growth shareholder return.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
