What McDonald’s Corporation (MCD) Bought With Its Earnings

When a good stock falls, income investors halt the fall first.

What McDonald's Corporation (MCD) Bought With Its Earnings

So it is with McDonald’s Corporation (NYSE:MCD), which began rolling over in May as growth investors saw how difficult the turnaround task of CEO Steve Easterbrook was going to be.

Going into earnings, analysts were expecting earnings of $1.48 per share of MCD stock on revenue of $6.29 billion, although there was a “whisper number” of $1.52 per share on earnings.

That would be a 20% gain in earnings on revenue unchanged from the last quarter, but down $300 million from the same time a year ago, and easily clear the company’s 89 cent per share dividend.

Instead, McDonald’s delivered net income of $1.28 billion, per-share earnings of $1.50 and revenue of $6.42 billion. This was right between the consensus estimate and the whisper number.

MCD stock is up 3.5% nearing the closing bell Friday.

The company had warned earlier this month it would take a $130 million or 12 cent per share pre-tax charge on the earnings to cover some non-cash costs of its refranchising, and if that were taken into account you would have a solid beat.

Today’s reaction was assuredly better than the reaction to the July earnings, which had sent the shares down 12% over the previous three months. Easterbrook had taken over with McDonald’s stock stuck below $100/share and gained credibility quickly with his all-day breakfast initiative, delivering quick gains.

But the rest of his plans — refranchising thousands of stores and making MCD an alliance of corporate owners rather than a collection of entrepreneurial ones — were going to take years to execute, so many abandoned the stock.

The fall in price, however, brought the yield of the shares up to their present 3.3%, and the company has had no trouble out-earning its dividend even in down years.

Bottom Line on MCD Stock

While TV analysts usually call McDonald’s a “restaurant chain,” Easterbrook wants to make it more a collection of franchises. Franchises have higher net income but lower revenue than chains, since they’re selling branded goods and advertising to other businesses, rather than food directly to customers.

The company hopes to resell 4,000 stores over the next two years. Franchisees themselves are reporting that their sales are flat.

Easterbrook is in the process of building his team, allowing veteran executives to walk. The company he is building will in the business of managing local, regional and national chains alongside with corporate partners. This should allow the restaurants to adapt more quickly to local tastes, and deliver more regular earnings with higher margins for the franchisor.

Thus, analysts remain bullish on the stock. It won’t break out on these earnings, but instead build a base that gives Easterbrook more time to execute.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/mcdonalds-corporation-mcd-stock-earnings-ipmedia/.

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