2018 EPS expectations

McDonald’s (MCD) posted adjusted EPS of $5.88 in the first three quarters of 2018, representing a rise of 18.5% from $4.96 in the first three quarters of 2017. This EPS growth was driven by the expansion of the company’s EBIT margin, its lower effective tax rate, and its share repurchases partially offset by a fall in its revenue.

During the period, McDonald’s EBIT margin expanded from 38.4% to 43.6% due to growth in its franchise business from its refranchising of its company-owned restaurants and sales leverage from positive SSSG (same-store sales growth). However, some of the expansion was offset by an increase in its selling, general, and administrative expenses.

McDonald’s EPS Growth Could Fall in 2019

Analysts expect McDonald’s to post adjusted EPS of $1.89 in the fourth quarter to take its total EPS for 2018 to $7.75, a rise of 16.4% from $6.66 in 2017. During the same period, Starbucks (SBUX) and Wendy’s (WEN) are expected to post EPS rises of 13.5% and 32.6%, respectively, while Jack in the Box’s (JACK) EPS are likely to fall 1.4%.

Analysts’ EPS estimates for 2019

From 2019 onward, McDonald’s management expects its EPS to rise in the high single digits. In 2019, analysts expect McDonald’s to post adjusted EPS of $8.23, a rise of 6.2% from $7.75 in 2018. EBIT expansion and share repurchases will likely drive this EPS growth. Analysts expect McDonald’s EBIT margin to improve from 43.2% to 45.3% in 2019.

At the end of the third quarter, the company had $7.98 billion left under its share repurchase program. Share repurchases drive a company’s EPS by lowering its number of shares outstanding. In 2019, Starbucks, Wendy’s, and Jack in the Box are expected to post EPS rises of 13.2%, 16.4%, and 14.6%, respectively.

Valuation multiple

On December 4, McDonald’s was trading at a forward PE multiple of 22.6x. In comparison, Starbucks, Wendy’s, and Jack in the Box were trading at forward PE multiples of 24.7x, 26.8x, and 18.0x, respectively.

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