McDonald's Delivers on Earnings, and Analysts Expect More


Teresa Rivas

Jan 30, 2019

McDonald's stock (ticker: MCD) is rising on Wednesday after the fast food giant's reported better-than-expected fourth-quarter earnings, and analysts are happy with the results as well.

     The back story: In a painful year for stocks, a 2% gain is a victory. That's how McDonald's came to land near the top of the Dow Jones Industrial Average in terms of performance for 2018. It didn't always look like that's how it would shake out. The company was spending heavily to remodel locations in its 'Experience of the Future' (EOTF) strategy, which caused downtime for restaurants and hurt sales. Analysts were growing impatient with the stock, and it grabbed some negative press for a food-borne-illness incident linked to its salads.

     Yet McDonald's had plenty of good things going for it as well, including the fact that EOTF spending has been winding down and remodeled locations were showing the benefits of the program. McDonald's also increased its dividend payout and put up a string of strong earnings. That last report came in October, when it beat top- and bottom-line estimates, allowing the shares to rise on a down day for stocks. There were plenty of market downdrafts in the fourth quarter, of course, and the stock's defensive characteristics helped boost it through the end of the year.

     The plot twist: McDonald's is rising again on Wednesday, as it once again delivered better-than-expected earnings. The company said it earned $1.97 a share, ahead of the $1.89 analysts were expecting, with revenue of $5.16 billion, in line with consensus estimates. Comparable domestic sales rose 2.3% in the quarter, and average check sizes grew, thanks to price increases and a changed mix of products. Global same-restaurant sales climbed 4.4%, with strength across a variety of markets.

     McDonald's predicts it will achieve average long-term sales growth of 3% to 5%, while earnings per share increase at percentages in the high single digits. It's planning to open 1,200 restaurants this year. (The company doesn't typically provide regular quarterly or annual guidance.)

     Moving forward. Not surprisingly, analysts were fairly happy with the figures. Bernstein's Sarah Senatore writes that McDonald's strength throughout various geographic regions is especially heartening given slowing growth in China and weakness in Europe. "McDonald's business appears nearly unstoppable" in the U.K., while in the U.S., "early signs of strength in the current quarter and management confidence in its plan are encouraging," she said. The quarterly results are "a testament to the resilience of the McDonald's model," Senatore wrote.

     Gordon Haskett's Jeff Farmer is similarly bullish. Although a lower-than-expected tax rate accounted for much of the surprisingly strong profit, he said he is still upbeat about McDonald's, predicting that its international businesses will remain strong through the first half of the year. That should offset the impact of business lost due to remodeling efforts in the U.S., Farmer says.

     He expects McDonald's will achieve a slow, but steady, increase in enterprise value relative to earnings before interest, taxes, depreciation, and amortization over the next several quarters as free cash flow improves and investors get a better understanding of the EOTF strategy.

     McDonald's was up 1.7% to $185.20 in morning trading. Although it outperformed the market last year, the stock also avoided a problem some of its more defensive peers have struggled with in 2019. Investors have lost interest in those shares as the market rebounded from its December lows, but McDonald's stock is up more than 4% year to date.

     That might surprise some, given that plenty of internationally focused consumer companies have been punished by the market, due to uncertainty over economic growth and tension between the U.S. and China over trade. The restaurant chain's fairly steady growth, strong balance sheet, and 2.6% dividend yield have help to offset those worries.