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McDonald’s Earnings: What to Expect in Q2

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For the second quarter, McDonald’s earnings are expected before the market opens on Friday. Overall, analysts expect the company’s revenues to fall. McDonald’s (MCD) adjusted EPS will likely rise in the low single digits.

McDonald’s second-quarter earnings

For the second quarter, analysts expect McDonald’s to report revenues of $5.33 billion. However, the company’s revenues could fall 0.5% YoY (year-over-year) from $5.35 billion in the second quarter of 2018. To optimize operations, McDonald’s plans to increase its franchised restaurants’ count to 95% of the system. By the end of the first quarter, 92.9% of the restaurants were franchised restaurants. So, refranchising and unfavorable currency translations could lower the company’s revenues in the second quarter.

By the end of the first quarter, McDonald’s operated 2,693 company-owned restaurants and 35,278 franchised restaurants. Compared to the second quarter of 2018, McDonald’s operated 192 fewer company-owned restaurants at the end of the first quarter, which could lower its revenues.

However, the net addition of franchised restaurants and same-store sales growth could offset some of the declines. By the end of the first quarter, McDonald’s operated 757 more franchised restaurants than it operated at the end of the second quarter of 2018.

SSSG drivers

McDonald’s management is remodeling old restaurants, expanding its delivery service, implementing digital services, and incorporating menu innovations to drive its SSSG (same-store sales growth). To enhance the in-store experience for its customers, McDonald’s is deploying the EOTF (Experience of the Future) model to more restaurants.

McDonald’s has plans to deploy EOTF in 2,000 restaurants this year, which includes remodeling of 400 restaurants to EOTF in the first quarter. Notably, the company’s delivery sales from company-owned restaurants and franchised restaurants crossed $3 billion. The company has been expanding its delivery sales to more restaurants. By the end of the first quarter, McDonald’s offered its delivery service in over 20,000 restaurants across 75 countries.

On July 16, McDonald’s agreed to a delivery deal with DoorDash. Starting on July 29, DoorDash will offer the delivery service in 200 restaurants in Houston. Depending on the performance in Houston, McDonald’s plans to expand the service to other US restaurants.

Will McDonald’s earnings rise?

Analysts expect McDonald’s to report an adjusted EPS of $2.05. The company’s EPS could increase by 3.0% YoY from $1.99 in the second quarter of 2018. The improved EBIT margin, lower effective tax rate, and lower number of shares outstanding could drive McDonald’s EPS. However, lower sales and higher interest expenses could offset some of the increases in the EPS.

Analysts expect McDonald’s EBIT margin to improve from 44.0% to 44.2% in the second quarter. The growth in the higher-margin franchise business and sales leverage from positive SSSG could drive the company’s EBIT margin. Refranchising company-owned restaurants and opening new franchised restaurants could increase the revenues from McDonald’s franchised business. However, growth investments and labor inflation could lower the company’s EBIT margin.

From the beginning of the third quarter of 2018 until the end of the first quarter, the company repurchased 16.8 million shares for approximately $2.86 billion. By the end of the first quarter, McDonald’s could repurchase shares worth approximately $6.05 billion. Notably, share repurchases drive the company’s EPS by lowering the number of shares outstanding.

McDonald’s outlook

For 2019, analysts expect McDonald’s revenue growth to be flat at $21.03 billion. For the same period, they expect the company’s EPS to rise by 1.5% to $8.02.

McDonald’s stock performance

At the end of Monday, McDonald’s was trading at $215.0, which is close to its 52-week high of $216.26. The company was trading at a premium of 40.4% from its 52-week low of $153.13. McDonald’s stock price has increased by 9.1% since the announcement of its first-quarter earnings on April 30. The company’s stock price increased due to its impressive first-quarter performance and the initiatives to drive its SSSG. In the first quarter, McDonald’s reported an adjusted EPS of $1.78 on revenues of $4.96 billion. For the first quarter, McDonald’s outperformed analysts’ EPS expectation of $1.75 and a revenue estimate of $4.93 billion. To learn more, read McDonald’s Beat Analysts’ Q1 Expectations.

The low unemployment rate, wage inflation, and improved consumer confidence caused customers to spend more at restaurants. Stronger consumer sentiment raised the company’s stock prices.

McDonald’s has returned 21.1% year-to-date. In comparison, the S&P 500 Index has returned 19.1%. During the same period, Starbucks (SBUX) and Dunkin’ Brands (DNKN) have returned 41.2% and 24.3%, respectively.

Valuation multiple

The recent increase in McDonald’s stock price hiked its valuation multiple. As of Monday, the company was trading at a forward PE ratio of 25.6x. In comparison, McDonald’s was trading at a discount compared to Starbucks. Meanwhile, Starbucks was trading at a forward PE ratio of 30.2x. On the same day, Dunkin’ Brands was trading at a forward PE ratio of 25.5x.

On Monday, McDonald’s was trading at 26.8x analysts’ 2019 EPS estimate of $8.02 and 24.7x analysts’ 2020 EPS estimate of $8.71. The company’s EPS will likely increase by 1.5% in 2019 and 8.6% in 2020.

Analysts’ recommendations

Analysts favor a “buy” rating before McDonald’s second-quarter earnings. Among the 32 analysts that follow the stock, 78.1% recommended a “buy.” The remaining analysts recommended a “hold.” On average, analysts have given McDonald’s a 12-month target price of $222.04. The target price implies an upside potential of 3.3% from its stock price of $215.0.

Since the beginning of June, UBS, Stifel, J.P. Morgan, Jefferies, Piper Jaffray, Telsey Advisory Group, and Cowen and Company have all raised their target prices. On June 25, Credit Suisse initiated coverage on McDonald’s with an “outperform” rating and a target price of $230.

Starbucks will likely report its third-quarter earnings after the market closes on Thursday. To learn more, read Starbucks to Report Double-Digit EPS Growth in Q3.

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