Don't Overreact to McDonald's Results

TheStreet.com

NEW YORK (TheStreet) -- With weak third-quarter results coming out from Yum! Brands and Coca-Cola , McDonald's investors are chewing their nails, anxiously anticipating what the fast-food giant will say on Monday. I wouldn't put too much emphasis on the company's quarter-to-quarter performance though.

First and foremost, the struggles of the entire consumer discretionary space are nothing new. Even the so-called "recession-proof" stocks like Wal-Mart have been hurt by weak same-store sales and reduced traffic. I don't believe there has been anything to suggest that these concerns will be immediately reversed as a result of the recent government shutdown.

For McDonald's, whose Golden Arches have long been the gold standard in the U.S. quick-service space, weak margins and sluggishness in China have taken a toll on the company's recent performance.

Last but not least, the company is now dealing with controversy as complaints have emerged regarding what many advocates believe to be poor wages for its frontline workers.

In fairness, McDonald's is not the only company "adhering" to minimum wage laws, and there is a point where the company is unfairly targeted. That said, management now has its hands full trying to improve slowing growth and profits in order to please investors and working to preserve the firm's public image.

Remarkably, the stock is remarkably only 6% down over the past six months. This speaks to the level of respect McDonald's has earned. While I'm not ready to suggest that the stock is cheap, with the company due to report earnings on Monday, now is as good a time as any to add to an existing long position.

The Street will be looking for McDonald's to report earnings-per-share of $1.51 on revenue of $7.34 billion, which would represent revenue growth of 2.6%. As noted, Yum! Brands' results, which included a 3% year-over-year revenue decline due (in part) to weak performance in China, don't bode well for McDonald's.

Now I'm making this comparison knowing full well that Yum! has had some extraordinary circumstances in China, including scandals regarding two suppliers to its KFC restaurants and fears over the health of its chickens. So it's not exactly an apples-to-apples comparison with McDonald's.

That said, it's worth noting that in the July quarter, both companies posted 1% growth in same-store sales, the metric tracking performances of restaurants opened for at least one year. Not only that, both companies have trended comparably in their strengths and weaknesses, including posting similar 1% growth in the U.S. All this while both companies suffered weak revenue results internationally.

It's foolish to put too much emphasis on one quarter with McDonald's, especially given the company's size and scale. Besides, as one of the largest franchisers in the world, revenue growth alone is not always an accurate gauge of the company's true performance.

Plus, with the company's continued focus on service, value and innovation, I believe McDonald's will emerge out of this rut to drive solid long-term profits. What I'm not expecting however, is a quick recovery or the notion that management will say something on Monday that will "make or break" the company.

I believe the stock will regain its $100 mark some time in 2014. At that point gourmet results will begin to pour in. Not before.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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