The Exchange

Netflix Up, McDonald’s Down? That’s Not the Whole Story

The Exchange

By Marek Fuchs

Netflix (NFLX) and McDonald's (MCD) both report on Monday, which means contradiction and paradox will be in the air. Netflix, previously given up for gone, is now ascendant. McDonald's, once thought of as infallible – even in difficult economies - is suffering.

Problem is, the media is bound to harness the reports together, drawing all the wrong conclusions. They will set up a false construct: that because they report on the same day, these companies are somehow linked, then revive variants of “new and old economy” story lines they favored during the Internet bubble of the late 1990’s.

You can see the headlines already, can’t you? “Netflix Enjoys Breaking Bad as McDonald’s Breaks Bad.”

Worse, the media is bound to dust off old buzzwords, telling the Netflix/McDonald’s divergence story as a tale of two economies. Netflix will be depicted as part of the new and innovative economy, with rising clout. McDonald’s will be portrayed as a relic of the aching old guard.

Don’t give into this easy temptation. Those who do are building themselves a house of cards.

The facts

Here’s the little we know for certain: According to FactSet, McDonald’s analysts are expecting earnings of $1.51 per share on revenue of $7.33 billion. This compares to $1.43 per share on revenue of $7.15 billion in last year’s third quarter, but numbers have come down several pennies over the course of the current quarter and second quarter’s earnings were a decided disappointment. Flattish same store sales and a recent Goldman Sachs (GS) survey of 2,000 McDonald’s customers held that the public is less than enamored with McDonald’s for a raft of reasons.

To make matters worse for McDonald’s, which is due to report before the stock market opens on Monday, fast food workers have been rumbling about low-pay and insufficient healthcare; attempts are underway to strike and possibly unionize.

Netflix, by happy contrast, is expected to showcase a huge jump in profits – to $0.48 from $0.13. Estimates for Netflix, which is scheduled for an after-the-close report on Monday, have gone up in the past three months by about the same measure as the official guesses for McDonald’s have gone down. Though McDonald’s top line is only expected a rock skip higher, Netflix is seen reporting a 22% increase in sales, to $1.10 billion.

With all the talk of McDonald’s lameness and Netflix’s crazy-amazing earnings, the market is destined to forget how quickly fortunes have shifted – and how many new turns and variables Netflix still faces. It wasn’t too long ago, of course, that McDonald’s was touted as a case study in consistency during troubled times, boasting admirable increases in same-store sales and profits during some of the worst of the financial crisis – and beyond.

How quickly fortunes turn

Netflix is flying high now, but you run the risk of whiplash looking at its chart and one only has to harken back to 2011’s third quarter to see apparently hopeless fortunes. Last year’s third quarter was up from “brutal,” but headline writers still had to deploy the term “slump.”

How quickly fortunes turn.

But considering – and with all due apologies to the human need to draw conclusions - pulling a thread of lasting thought out of a quick pairing of these earnings might prove foolhardy.

Uncertainties abound

Another word to the wise: Even within the technology sector, we have a variety of fortunes. If there is a new economy of any kind, it comes it many shades. Just look at recent developments - Ebay (EBAY) and IBM (IBM) are laggards, Intel (INTC) is a reduced power, while Dell (DELL) and Hewlett-Packard (HPQ) are potentially ruined. Google (GOOG) managed to surmount lower advertising rates on its way to good results and wild swings of Apple (AAPL) stand as a lasting lesson that we live in the land of the lurch. Between technology and international trade, the modern competitive landscape offers, at every turn, equal parts opportunity and treachery.

Avoid the absolutism of the new/old economy canard.

Uncertainties abound – probably more so on the side of Netflix, which must contend with competition from Amazon (AMZN) and countless lurking newcomers, as well as the cable companies. For all its strengths, its industry is still in the larval stage.

McDonald’s has to clean up its rambling menu, make a shift toward healthier fare and deal with a competitive industry in the context of a troubled global economy. While Netflix has to conjure up the next Walter White, McDonald’s has to invent another McCafe.

The takeaway?

Laying these companies end-to-end in an attempt to reach a jointly held conclusion will only lead to mistakes.

No joint lessons apply.

The diverging paths of these companies – to borrow from Shakespeare – signify nothing. No matter what they tell you, Netflix is not the new evergreen.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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