McDonald's Breakfast Wars Earnings Preview

| About: McDonald's Corporation (MCD)
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McDonald’s Corp. (NYSE:MCD) is set to report FQ1 2014 earnings before the market opens on Tuesday, April 22nd. On Tuesday earnings reports from both McDonald’s and Yum! Brands (NYSE:YUM) may indicate who has drawn first blood in the fast food breakfast wars. Taco Bell recently rolled out a breakfast menu, while McDonald’s countered by offering a free coffee promotion, which could boost sales but simultaneously pressure margins. With the United States going through a shift away from greasy fast food, McDonald’s has done a commendable job to add fresh and healthy alternatives to its menu like oatmeal, salads, and yogurt. This quarter, Wall Street expects MCD’s EPS to fall by 3c while revenue rises by 2% compared to FQ1 of last year. Here’s what investors are expecting on Tuesday.

The information below is derived from data submitted to the platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see Estimates and Interactive Features for McDonald’s)

The current Wall Street consensus expectation is for McDonald’s to report $1.23 EPS and $6.732B revenue, while the current consensus from 26 Buy Side and Independent contributing analysts is $1.24 EPS and $6.735B in revenue. This quarter, the buy side as represented by the community is expecting McDonald’s to beat the Wall Street consensus on both EPS and revenue by a very small margin.

By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors, Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly, it does a better job of representing the market’s actual expectations. It has been confirmed by Deutsche Bank (NYSE:DB) Quant. Research and an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we are seeing a thin differential between the two groups’ expectations.

The distribution of estimates published by analysts on the platform range from $1.21 to $1.27 EPS and from $6.622B to $6.816B in revenues. This quarter, we’re seeing a narrow distribution of estimates on MCD.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A narrow distribution of estimates signals more agreement in the market, which could mean less volatility post earnings.

Over the past 4 months, the Wall Street EPS consensus has fallen from $1.28 to $1.23, while the Estimize consensus declined from $1.28 to $1.24. Meanwhile, the Wall Street revenue consensus sank from $6.878B to $6.732B, while the Estimize consensus gradually decreased from $6.842B to $6.735B. Timeliness is correlated with accuracy, and downward estimate revisions at the end of the quarter are often a bearish indicator.

The analyst with the highest estimate confidence rating this quarter is WallStreetBean, who projects $1.24 EPS and $6.712B in revenue. WallStreetBean is ranked 10th overall among over 4,150 contributing analysts. This season, WallStreetBean has been more accurate than Wall Street in forecasting EPS and revenue 64% of the time throughout 11 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research, which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, WallStreetBean is expecting McDonald’s to report in-line with the Estimize community’s EPS consensus, but come up short on revenue.

Fast food breakfast wars have played out on the public stage this quarter. Taco Bell targeted Mickie D’s with an ad campaign featuring real men named Ronald McDonald talking about how much they loved the new Taco Bell breakfast offerings. McDonald’s maintains roughly 30% market share on the breakfast crowd and has bigger fish to fry than Taco Bell. Instead, McDonald’s is setting its sights on Dunkin’ Brands (NASDAQ:DNKN) and Starbucks (NASDAQ:SBUX), which have both experienced phenomenal growth in recent years. Giving away free coffee is an inexpensive ploy to get more breakfast goers in the door and if any of them add a morning coffee at McDonald’s to their daily routine instead of Starbucks or Dunkin' Donuts, this could prove to be a fruitful move.

Disclosure: None