Earnings Scorecard: McDonald's

Jan. 28, 2011 3:00 PM ETMcDonald's Corporation (MCD)

On January 24, McDonald’s Corporation (NYSE:MCD) reported its fourth quarter fiscal 2010 earnings of $1.16 cents per share, in line with the Zacks Consensus Estimate. Given below is our report on the recent earnings announcement, as well as subsequent analyst estimate revisions over short and long-term periods.

Earnings Report Flashback

McDonald’s said that revenues for the quarter climbed 4% to $6.21 billion, outperforming the Zacks Consensus Estimate of $6.19 billion. Excluding the negative impact of foreign currency translation, revenues grew 5.0% year over year.

Revenues from company-operated restaurants rose 3% to $4.2 billion while revenues from franchise-operated restaurants jumped 5% to $2.0 billion. Total operating income grew 2% to $1.9 billion.

Earnings Estimate RevisionsL Overview

Following the release of fourth quarter results, estimate revision trends among the analysts depict a mixed outlook. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

Over the last seven days, a negative trend is palpable for the first quarter of 2011, with earnings estimates being decreased by five out of 21 analysts. On the other hand, an upward revision in estimate was made by three analysts. The analysts expect gross margin to suffer in the first quarter due to rising commodity costs as well as an increased tax rate.

However, the analysts remained slightly optimistic on fiscal 2011 earnings, as six analysts out of 25 upped their estimates and five lowered the same. The positive note was more pronounced for 2012, as four out of 19 analysts went for estimate increment while two analysts went for reduction.

The analysts, by and large, are optimistic on the national McRib advertising campaign, the rollout of oatmeal in January and frozen lemonade slated to launch in summer. Smoothies and Frappes continued to surpass all sales targets despite a severe winter. The company still sees some benefit from Frappes and Smoothies in 2011.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for McDonald’s has been moderate over the last seven days. Following the release of third quarter results, estimates for the first quarter and fiscal 2011 have not budged. The estimate for fiscal 2012 has been raised by one penny.

Currently, the Zacks Consensus Estimate for the first quarter is $1.09 per share. For 2011 and 2012, the Zacks Consensus Estimates are $5.02 and $5.48, respectively.

Our Recommendation

McDonald’s continues to enjoy increased global same-store sales, and healthy traffic despite adverse weather conditions in the fourth quarter. The company is operating at the leading position in the industry.

We believe the stock provides relative safety and moderate growth prospects with its exposure to faster-growing international markets, a strong balance sheet, consistent revenue growth through unit expansion and a stable comps momentum driven by value offerings as well as premium products. Sound same-store sales results in the U.S. clearly points to the turnaround in consumer confidence, which had faltered in the last couple of quarters.

However, McDonald’s is not yet totally immune to challenges. We expect the company’s margins expansion to be limited in the upcoming quarter due to higher commodity costs as well as tax rate. In the past couple of years, the company’s effective tax rate benefited by approximately 2 percentage points owing to certain foreign tax credits. With a recent change in tax law, these credits are no longer available to McDonald’s.

Business in Europe might be affected by the implementation of some austerity measures and value-added tax increases in some European countries like the U.K., Poland and Portugal that will drive price increases to consumers while providing no same-store sales benefit.

McDonald’s currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of the company's close peers, Yum Brands Inc. (YUM), is slated to announce its fourth quarter 2010 earnings on February 2, 2011.

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