Global Growth Can Help McDonald’s Reach $98 With Earnings Release

MCD: McDonald's logo

McDonald’s Corporation (NYSE:MCD) is scheduled to announce its Q2 earnings on July 23. The stock has declined close to 10% this quarter due to disappointing comparable sales for April and May. McDonald’s will announce the comparable sales growth figure for June along with its quarterly earnings. Comparable sales growth is an important metric to determine a restaurant’s performance since it excludes the performance of restaurants opened within the last 12 months, the sales of which can be unusually high or low. Although the top-line growth for this quarter might not match the previous quarter, we generally expect the fast food chain’s performance will improve in the subsequent quarters helped by new product introductions and restaurant remodeling.

We have a $98 price estimate for McDonald’s, which is more than 10% higher than the market price.

Performance in the U.S. Has Been Solid

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Europe is the biggest revenue generating region for the company so the ongoing debt crisis has investors worried about McDonald’s long-term performance. However, as we mentioned in our earlier article, the U.S. is the highest profit generating region (contributing ~40% of the total profits) for the fast food chain due to a higher proportion of franchised restaurants. Comparable sales growth has been subdued for the past two months but, on a year-to-date basis, the figure stands at 6.8% for the U.S. With the help of new products such as blueberry banana nut oatmeal and McCafe cherry berry chiller (both launched in May) and mango pineapple smoothie (introduced in June), we expect the sales of its U.S. restaurants to have picked up June onward.

Resilient Europe and Burgeoning Presence in Asia Offer Hope

McDonald’s is feeling the pinch of the European debt crisis; nevertheless its performance in the region has been quite stable with same store sales registering a 4.2% gain year-to-date. For April and May, the figure stood at 3.5% and 2.9%, respectively. This again highlights the company’s ability to perform modestly at a time when most of the companies are struggling to generate positive sales growth.

Most of the investors were expecting same store sales growth in APMEA (Asia/Pacific, Middle East and Africa) to outpace that of its U.S. and European counterparts, but the figure has been surprisingly low with the May figure turning to red. But part of the reason why McDonald’s is witnessing lower comparable sales growth in the region is because of its accelerated store openings in the region. It plans to add around 250 new restaurants in China itself. Thus, top-line growth in the region will come from increased presence rather than the existing restaurants generating higher sales.

We do not think there will be any significant change in the franchised margins since they are generally dependent on the long-term contracts McDonald’s has with its franchisees. However, limited same store sales growth in this quarter could lead to a short-term deterioration of company-operated restaurant margins.

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