McDonald’s Q3 Earnings: What Are We Watching?

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McDonald’s stock (NYSE: MCD), a restaurant chain consisting of more than 40,000 mostly franchised stores, is scheduled to report its fiscal third-quarter results on Thursday, October 27. We expect MCD stock to likely trade lower with revenues coming almost in line, but earnings missing expectations in Q3 results. McDonald’s decided to sell its business (850 stores) in Russia because of the invasion of Ukraine. We expect this quarter to feel the pressure of the closure of Russian stores and the uncertainty of energy supply in Europe over the coming months. Additionally, rising costs also continue to bite into restaurant operating margins, necessitating price increases to offset inflation.

While MCD mentioned that it would start reopening its restaurants in Ukraine in the coming months, it is still unclear how many of these 109 locations would be reopened in the near future. It should be noted that Russia represented 2% of McDonald’s systemwide sales, 7% of revenue, and 2% of operating income. McDonald’s runs on a franchisee business model, and takes a percentage of systemwide sales as revenue.

Our forecast indicates that McDonald’s valuation is $240 per share, which is 6% lower than the current market price. Look at our interactive dashboard analysis on McDonald’s Earnings Preview: What To Expect in Fiscal Q3? for more details.

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(1) Revenues expected to be almost in line with consensus estimates

Trefis estimates McDonald’s Q3 2022 revenues to be around $5.7 Bil, almost in line with the consensus estimate. In Q2, McDonald’s revenue fell 3% y-o-y to $5.7 billion. Sales fell despite the increase of 10% in comparable store sales due to headwinds from currency fluctuations and the divestiture of its business in Russia. The U.S market was the weakest major geography with comps rising by less than 4%. Price hikes accounted for most of the comp gains in Q2. The company’s digital sales surpassed 33% of overall sales in its top six markets. We forecast McDonald’s Revenues to be $23.6 billion for the fiscal year 2022, up 2% y-o-y. McDonald’s doesn’t issue short-term sales guidance, but it expects operating profit margin for the full  year 2022 to be in the mid-40s percentage, despite accelerating inflation.

2) EPS is likely to miss consensus estimates

McDonald’s Q3 2022 earnings per share (EPS) is expected to come in at $2.50 per Trefis analysis, marginally missing the consensus estimate. In Q2, McDonald’s consolidated operating income decreased 36% y-o-y to $1.7 billion. Results included $1.2 billion of charges related to the sale of the company’s business in Russia and a gain of $271 million related to the company’s sale of its Dynamic Yield business. The closure of Russian locations since March has cost the company about $55 million per month. Consequently, MCD’s bottom line dropped 46% y-o-y to $1.60, due to charges mentioned above as well as settlement of a tax audit in France and other non-operating expenses.

(3) Stock price estimate lower than the current market price

Going by our McDonald’s Valuation, with an EPS estimate of around $9.91 and a P/E multiple of 24.2x in fiscal 2022, this translates into a price of $240, which is almost 6% lower than the current market price.

It is helpful to see how its peers stack up. MCD Peers shows how McDonald’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, McDonald’s has fallen 5% this year. Can it drop more? See how low can MCD stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Oct 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 MCD Return 11% -5% 110%
 S&P 500 Return 8% -19% 72%
 Trefis Multi-Strategy Portfolio 6% -22% 209%

[1] Month-to-date and year-to-date as of 10/26/2022
[2] Cumulative total returns since the end of 2016

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