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McDonald's: Investors Are Optimistic before Its 2Q17 Earnings

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Part 3
McDonald's: Investors Are Optimistic before Its 2Q17 Earnings PART 3 OF 6

Analysts Expect McDonald’s EBIT Margins to Expand in 2Q17

Estimated EBIT margins

Analysts expect McDonald’s (MCD) to post EBIT (earnings before interest and tax) of $2.14 billion in 2Q17—an EBIT margin of 36.0%. In 2Q16, the company posted an EBIT margin of 33.3%.

Analysts Expect McDonald&#8217;s EBIT Margins to Expand in 2Q17

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What could expand McDonald’s margins?

Increased revenue from franchised restaurants, a decline in SG&A (selling, general, and administrative) expenses, and sales leverage from positive same-store sales growth are expected to drive McDonald’s EBIT margins in 2Q17. Refranchising is expected to increase McDonald’s margins because the company enjoys higher margins from franchised restaurants.

Analysts expect the cost of sales to fall from 58.7% of the total revenue in 2Q16 to 46.7%. The company has taken several initiatives to reduce its SG&A expenses. The initiatives include redesigning its operations to eliminate layers and centralizing the non-customer-facing process to reduce expenses. These initiatives, along with refranchising, are expected to lower McDonald’s SG&A expenses from 9.5% to 9.2%. The depreciation and amortization expenses are also expected to fall from 6.1% to 5.8% in 2Q17.

Peer comparisons

During the same period, analysts expect Restaurant Brands International (QSR), Jack in the Box (JACK), and Wendy’s (WEN) to post EBIT margins of 42.2%, 25.7%, and 18.2%, respectively.

Outlook

During the next four quarters, analysts expect McDonald’s EBIT margins to improve to 39.4%—compared to 34.2% in the same quarters the previous year. The expansion is expected to be driven by refranchising and implementing technological advancement, which could lower labor requirements.

Next, we’ll look at McDonald’s earnings estimate for 2Q17.

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