Shares of McDonalds (MCD – Free McDonalds Stock Report) pulled back after the iconic restaurant operator released third-quarter financials that were a bit weaker than expected in a few areas. The top line wasn't an issue from our perspective, as the figure increased 1% (3% on a constant-currency basis) from a year earlier, to $5.431 billion, essentially matching our $5.430 billion forecast. However, the figure was slightly below the consensus on Wall Street. The company performed well overseas, but faced stiff competition in its home market. Indeed, the International Operated segment saw comparable-store sales increase 5.6%, while the International Developmental Licensed segment experienced an 8.1% uptick in comps. In the United States, the metric was up 4.8%, bringing the global comp to 5.9%. Growth in the key U.S. market was a bit below the Wall Street consensus, which was closer to 5.2%, and appeared to be one of the primary sticking points with investors.
The other main issues that the investment community had with the report was the bottom-line figure, which rose just a penny on a year-over-year basis, to $2.11. Our forecast was $2.17, and the consensus estimate was even higher, at about $2.21. Despite sales being on par with our call and the share count declining, total operating costs and expenses moved 66 basis points higher as a percentage of sales. Meantime, the tax rate increased 114 basis points and interest expense moved 51 basis points higher. Finally, unfavorable foreign currency movements were a $0.03-a-share headwind.
All told, it was certainly not a bad quarter for McDonald's. Same-store sales growth was broad based, albeit weighted toward overseas markets, and this marked the 17th-consecutive period of positive global comps. Management's embrace of technology to make the dining experience more enjoyable and efficient has been well received by consumers, as have its menu innovations and promotions. Fierce competition and higher costs were the likely factors behind the U.S. comp and earnings misses.
Looking ahead, we think that the fourth quarter will bring more of the same, meaning that management will continue to execute well but also face familiar headwinds. In light of this, we've shaved a dime from our full-year 2019 earnings estimate, which now sits at $7.85 a share.
As for McDonald's stock, we think that it has appeal as an income vehicle for conservative investors. In conjunction with the third-quarter earnings release, leadership announced an 8% increase in the quarterly cash dividend, to $1.25 a share. With this uptick and the stock's dip, the equity's yield is now around 2.5%. And the shares garner our top marks for Safety and Price Stability. They also sport a low Beta, and the company has our Highest Financial Strength rating of A++. That said, while the stock has pulled back from its all-time high of nearly $222 a share, capital gains potential remains limited here.
About The Company: McDonalds is a leading global foodservice retailer with over 37,000 locations in more than 100 countries (as of December 31, 2018). The majority of the restaurants (over 90%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
– Matthew E. Spencer, CFA
