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Upcoming Earnings: MCD Reports on Monday, a Year Into Growth Plan

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April 27, 2018
Cheeseburger and fries on a board
istockphoto.com/pekic

McDonald’s (MCD) is scheduled to report first-quarter earnings before market open on Monday, April 30, a little over a year into the company’s new global growth plan. 

Since taking over in 2015, CEO Steve Easterbrook had taken the company on a turnaround plan that included refranchising a large number of its corporate-owned stores, restructuring business segments and cutting expenses.

In March 2017, the company unveiled a new growth plan. The new growth plan largely centered around improving digital capabilities and increasing the use of technology in stores, expanding delivery across all of its markets, and modernizing stores to what it calls “experience of the future” restaurants.

When it last reported, MCD said it plans to spend $2.4 billion on investments in 2018, a majority dedicated to  upgrading restaurants in the U.S. to its new concepts. Its new restaurants have modernized interiors, self-serve kiosks, tableside service, and other changes that are part of the company’s plans to drive sales growth, attract new customers and retain old ones.

Another part of the company’s growth plans has been to expand delivery. Management said that delivery had continued to gain traction in Q4 and that it has become a meaningful contributor to same-store sales in some of its largest markets. Management also noted that the average check size of delivery orders tends to be 1.5 to 2 times larger than in-store orders. 

In Q4, global same-store sales were up 5.5%, the company’s 10th consecutive quarter of growth. For the full year, same-store sales increased 5.3%, MCD’s best growth rate in six years. Analyst opinions vary on whether or not growth can continue at that pace. Most are expecting low to mid-single-digit same-store sales growth in 2018.

McDonald’s Earnings

For Q1, MCD is expected to report adjusted EPS of $1.67 on revenue of $4.93 billion, according to third-party consensus estimates. In the same quarter last year, MCD earned $1.47 per share on revenue of $5.68 billion. Analysts have said the expected revenue decline is primarily a result of the company’s refranchising initiatives, which has shifted revenue from sales at company-operated restaurants to fees earned from franchises. 

MCD’s top and bottom-line have been getting a boost from a weaker U.S. dollar. When it last reported, management said they expected current exchange rates to have a positive impact of $0.07 to $0.09 on earnings in Q1 and $0.23 to $0.25 for all of 2018. The dollar has started to climb the past few weeks, which could diminish that impact if it remains elevated. 

McDonald's Stock Chart

MCDONALD’S 2018 STOCK CHART.

MCD hit a new all-time high of $178.70 at the end of March. The stock got hit in early March when an analyst slashed estimates for MCD’s same store sales, citing disappointing sales for the company’s new value menu. The stock has recovered from the low after that report and since mid-March, it has been trading in a range between $155 and $165. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

McDonald’s Trading Activity

Investors seem to be happy with the changes and progress Easterbrook has been making in the company’s turnaround plans, as the stock was up almost 44% in 2017 and it hit a new all-time high of $178.70 at the end of January. It has since pulled back, but it has bounced a bit off of its recent low of $146.84 it hit on Mar. 2. Since mid-March, MCD has been trading between a range of $155 to $165.

Around Monday’s earnings release, options traders have priced in about a 3.2% stock move in either direction, according to options data from the thinkorswim® platform.  Implied volatility was at the 51st percentile as of this morning.

In short-term trading at the May 4 weekly expiration, calls have been active at the 160 and 162.5 strikes, while trading on the put side has been concentrated at the 155 strike.

Further out at the May 18 monthly expiration, trading in calls has been heavier at the 160, 165 and 170 strikes, although the 170-strike call is a ways out of the money. On the put side, trading has been concentrated at the 155 and 160 strikes. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

What’s Coming Up

Earnings season slows down a little bit next week, although there are still quite a few major reports on tap:

  • Pfizer (PFE) and Merck (MRK) both report before the open on Tuesday, May 1
  • Apple (AAPL) reports after the close on Tuesday, May 1
  • Tesla (TSLA) reports after the close on Wednesday, May 2
  • Alibaba (BABA) reports before the open on Friday, May 4

Next week the Fed will also be meeting on May 1-2. There isn’t expected to be a whole lot new coming out of that meeting and there’s a 93% probability the Fed won’t hike rates, according to the CME FedWatch tool. If you have time, check out today’s market update for a look at what else is going on.

Good Trading,
JJ
@TDAJJKinahan

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