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Will McDonald’s Stock Fall after Its Q3 Earnings?

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  • McDonald’s is scheduled to announce its third-quarter earnings on Tuesday.
  • J.P. Morgan expects the company’s comparable sales or comps growth to moderate.
  • The sales and EPS growth will accelerate based on analysts’ consensus estimates.

McDonald’s (MCD) is scheduled to announce its third-quarter earnings on Tuesday. Notably, analysts’ consensus estimate suggests that the company’s revenues and earnings growth rate could accelerate sequentially. However, J.P. Morgan analyst John Ivankoe thinks otherwise. He lowered his comps growth outlook for the third quarter, which could hurt McDonald’s stock. Ivankoe reduced his comps growth outlook to 5% from 6%, according to a CNBC report.

Despite reducing the comps growth outlook, J.P. Morgan reaffirmed its “overweight” rating on McDonald’s stock with a target price of $230.

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McDonald’s third-quarter earnings 

Analysts expect McDonald’s to post revenues of $5.49 billion, which implies YoY (year-over-year) growth of 2.3%. Notably, the projection indicates a sequential acceleration in the sales growth rate. In the previous quarter, McDonald’s revenues remained flat. However, the top line beat analysts’ consensus estimate due to better-than-expected comps growth.

McDonald’s global comps increased 6.5%, which was higher than analysts’ expectation of 5.1% growth. Growth across all of the segments supported the comps growth. McDonald’s menu innovation and delivery expansion could continue to drive its comps. However, competitive activity could remain a drag. Notably, the fight for morning traffic intensified. Wendy’s (WEN) announced the nation-wide expansion of its breakfast menu.

Last month, Wendy’s announced that it plans to invest $20 million to expand its breakfast menu nationwide in 2020. The company reduced its earnings outlook. Expansion investments will likely take a toll on the company’s margins.

Overall, analysts expect McDonald’s to post an adjusted EPS of $2.21 in the third quarter, which implies growth of 5.2% YoY. The projection shows a sequential acceleration in the growth rate. During the last reported quarter, McDonald’s posted an adjusted EPS of $2.05, which increased 3.0% YoY. The adjusted EPS was in line with analysts’ consensus estimates.

Improved comps and share repurchases will likely drive McDonald’s bottom line in the third quarter. However, higher interest expenses could continue to hurt.

Chipotle (CMG) is scheduled to announce its third-quarter earnings on Tuesday. We expect Chipotle to post strong sales and earnings growth. The company will likely outperform analysts’ earnings estimates.

So far, McDonald’s stock has risen 17.4% YTD as of October 18. Meanwhile, Chipotle and Wendy’s stocks have risen about 95% and 38%, respectively.

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