Investors Seeking Safety? McDonald's Stock Is Up on a Down Day
Barron's
Oct 23, 2018
McDonald's shares are rising on Tuesday despite the broader selloff, helped by its thirdquarter earnings report.
Where we were: McDonald's (MCD) has lagged the market in 2018, hurt in part by higher investments and slower sales.
Where we're headed: Investors may be seeking safety in McDonald's as the market selloff continues, but the stock could also begin to reverse its underperformance if sales and margins
show improvement. There were few places to hide as the market slid on Tuesday, but McDonald's provided a port in the storm, following the restaurant giant's upbeat third-quarter earnings report.
McDonald's is up 2.5% to $170.66 after reporting third-quarter earnings. The restaurant giant earned $2.10 a share on revenue of $5.37 billion, while analysts were looking for
earnings of $1.99 on revenue of $5.28 billion. Global same-store sales rose 4.2%, ahead of expectations, reflecting positive comparable sales in all segments.
Beating earnings estimates is nothing new for McDonald's: The company's bottom-line results have come in comfortably ahead of expectations for the past three quarters, although
that's not done much to boost the stock. After a great 2017, the shares have stalled this year, following management's warning of potentially bumpy results. McDonald's is also in the
midst of a multibillion-dollar project to remodel most of its U.S. stores by 2020: The Experience of the Future redesign will showcase its investments in technology, and although
bulls point to the increased traffic that modernized locations boast, bears have been concerned about the sales slowdown caused by the disruption.
So while the bottom-line beat is part of the reason McDonald's is outperforming today, investors were probably heartened to see the same-store sales figure, which came in above the
second-quarter's 4% climb, demonstrating that strength in international segments is still helping to offset weaker U.S. traffic amid the remodeling projects. And in a market rout, a
flight to safety is probably also playing a part.
Gordon Haskett's Jeff Farmer reiterated a Buy rating and $185 price target, writing that McDonald's international business is "holding down the fort and then some" as the U.S. segment "absorbs short-term remodel-driven margins headwinds." In the coming quarters, he expects McDonald's valuation discount to its peers to narrow, thanks to greater investor appreciation of the remodeling program, better margin and U.S. same-store sales performance versus other fast food players, and more visibility into improved free cash flow metrics in 2020.
McDonald's is up 5.4% to $175.65 in recent trading.
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