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McDonald’s EBITDA Margins Could Get Squeezed

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EBITDA margins

McDonald’s (MCD) is expected to announce an EBITDA (earnings before interest, tax, depreciation, and amortization) of $2.06 billion with an EBITDA margin of 34.4%, according to analysts. So far in this series, we’ve covered McDonald’s (MCD) revenue, same-store sales growth, unit growth, segment performance, and expectations for the upcoming earnings. The upcoming earnings will be announced on April 22.

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EBITDA analysis

Wall Street analysts’ estimated EBITDA for the first quarter is $2.06 billion. This would mean a 12% decline—compared to $2.3 million in 1Q14. The EBITDA margins are expected to drop to 34.4%—compared to 36.8% last year.

EBITDA is the purest measure of a company’s revenue performance for any given financial period. Looking at the above chart, you can see that EBITDA demonstrates the seasonality in the business. The first quarter is the lowest—compared to the other quarters.

Seasonality and other factors affecting restaurants

It isn’t just seasonality that makes the revenue volatile. We’ve seen restaurants reporting lower sales in the first half of 2014 because of adverse weather conditions in the US. Several macroeconomic factors also affect sales for restaurants like McDonald’s, Dunkin’ Brands (DNKN)—which operates a cafe format, Yum! Brands (YUM)—which is a parent of KFC (Kentucky Fried Chicken), and the Consumer Discretionary sector (RXI(XLY). XLY holds 4% of McDonald’s stock and 1% of Chipotle Mexican Grill (CMG).

As we mentioned earlier in this series, McDonald’s is one of the companies that reports monthly same-store sales data. The stock increased ~8% since its previous earnings release. To wrap up this series, we’ll discuss the key number that investors should look for when McDonald’s releases its earnings.

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