McDonald’s (NYSE:MCD) will report its fourth-quarter earnings tomorrow before the market opens. For the quarter, analysts expect the company’s revenue to rise on a year-over-year basis. They expect McDonald’s EPS to fall marginally.
Analysts’ revenue estimates for McDonald’s
For the fourth quarter, analysts expect McDonald’s to report revenue of $5.31 billion—growth of 2.8% from $5.16 billion in the same quarter the previous year. Adding new restaurants in the last four quarters and positive SSSG (same-store sales growth) could drive the company’s revenue. However, refranchising company-owned restaurants and currency headwinds could offset some of the increases in revenue.
In the first three quarters of 2019, McDonald’s increased its franchised restaurants by 578 units. In addition to these restaurants, the restaurants opened in the fourth quarter could drive the company’s revenue. However, the unit count of company-owned restaurants fell by 135 units during the same period due to refranchising.
Same-store sales growth
McDonald’s management is focusing on implementing digital advancements, expanding its delivery service, menu innovations, and promotions to drive its SSSG. The company planned to convert 2,000 restaurants to EOTF (Experience of the Future) in 2019. By the end of the third quarter, the company implemented EOTF in over 9,000 restaurants, which represents two-thirds of its total restaurants in the US.
McDonald’s implemented the Dynamic Yield platform in over 9,500 drive-through restaurants in the US by the end of the third quarter. The company also announced that it would implement the technology in all of the US drive-through restaurants by the end of 2019. Dynamic Yield helps the company provide personalized offerings to customers depending on perferences, time of the day, and weather conditions. The company also planned to introduce the technology in all drive-through restaurants in Australia by the end of 2019.
Delivery is an important part of McDonald’s revenue contribution. The company expects its delivery to contribute $4 billion to system sales in 2019—an increase of $1 billion in three years. By the end of the third quarter, approximately 23,000 restaurants provided delivery service across 80 countries. McDelivery’s global average check is more than two times the restaurants’ average check size. Along with these initiatives, introducing menu offerings that suit local tastes and promotional offerings could drive the company’s SSSG in the fourth quarter.
Will McDonald’s EPS fall?
Analysts expect McDonald’s to report an EPS of $1.96 in the fourth quarter—a marginal fall from $1.97 in the fourth quarter of 2018. Analysts expect higher SG&A (selling, general, and administrative) expenses, increased interest expenses, and higher effective tax rates to lower the company’s EPS. However, increased sales and higher gross margins could offset some of the declines. McDonald’s investment in strategic initiatives might have prompted analysts to raise their SG&A expense estimates. They expect the company’s effective tax rate to be at 24.8% compared to 19.2% in the fourth quarter of 2018.
On September 19, McDonald’s announced quarterly dividends of $1.25 per share, which represents an annualized payout of $5.0 per share. As of January 27, the company’s dividend yield was 2.34%. In comparison, Starbucks (NASDAQ:SBUX) and Wendy’s (NASDAQ:WEN) dividend yields were 1.75% and 2.2%, respectively.
Analysts’ recommendations for McDonald’s
Since December 2019, KeyBanc and SunTrust Robinson have raised their target prices, while RBC has initiated its coverage on McDonald’s. On January 24, KeyBanc hiked its target price from $225 to $235, while SunTrust Robinson raised its target price from $230 to $250 on January 9. On December 10, RBC initiated its coverage on the stock with an “outperform” rating and a target price of $218.
Overall, analysts favor a “buy” rating for McDonald’s. Among the 35 analysts, 74.3% recommend a “buy,” while the remaining 25.7% recommend a “hold.” None of the analysts recommend a “sell.” As of Monday, analysts’ consensus target price was $225.55, which implies a 12-month return potential of 7.7%.
As of Monday, McDonald’s was trading at $209.34, which represents a fall of 0.2% since it reported its third-quarter earnings on October 21. The company’s stock price fell due to the weaker-than-expected third-quarter revenue and EPS and the abrupt exit of CEO Steve Easterbrook. However, RBC’s “outperform” rating and analysts’ price hikes offset some of the declines. So far this year, McDonald’s has returned 5.9%. Meanwhile, Starbucks, Wendy’s, and Shake Shack (NYSE:SHAK) have returned 0.9%, -0.7%, and 11.5%, respectively.
As of Monday, McDonald’s was trading at a forward PE ratio of 24.7x. The ratio increased from 24.4x before the announcement the company’s third-quarter earnings on October 21. Despite the decline in McDonald’s stock price, its valuation has increased. The decline in analysts’ EPS expectations could have caused its forward PE ratio to rise. Also, McDonald’s continues to trade at a discount compared to its peers. On the same day, Starbucks, Shake Shack, and Wendy’s were trading at a forward PE ratios of 28.0x, 111.03x, and 34.2x, respectively.
As of Monday, McDonald’s was trading at 24.6x analysts’ 2020 EPS estimate of $8.49. The company was trading at 23.0x analysts’ 2021 EPS estimate of $9.12. They expect the company’s EPS to rise by 8.3% in 2020 and by 7.4% in 2021.