We remain Neutral on restaurant company McDonald's Corp. (MCD). Although the world’s biggest burger chain could not surpass the Zacks Consensus Estimate on both lines in the second quarter of 2013, we still believe that the company has strong value.
Why the Reiteration?
On Jul 22, 2013, McDonald's reported second-quarter 2013 earnings of $1.38 per share, which missed the Zacks Consensus Estimate by 1.4%. We believe that a higher-than-expected adverse impact of currency translation of 2 cents per share led to the earnings miss. In fact, the negative impact of currency translation is expected to persist as management guided a negative impact of 7—9 cents on full year earnings.
McDonald's revenues of $7.1 billion barely met the estimate in the quarter. The comps scenario has also not been quite encouraging since the past few months mainly due to weak consumer spending environment. Global comps in the second quarter, though positive, were below the year-ago level.
McDonald’s has become extremely vulnerable to macroeconomic headwinds like debt concerns in Europe, decelerating growth in Asia and intense competition in the U.S. The company expects its performance in the second half of 2013 to be under pressure due to a sluggish business environment.
Further, margin pressure has also added to the company’s concern. Most of its sales building measures are value-oriented, which could prove detrimental to margins if exercised on a long-term basis.
However, despite these unenthusiastic facts, some positives prevent us from being too pessimistic on the stock. McDonald’s -- the world’s largest chain of fast food restaurants – is consistently striving to bounce back amid a challenging macroeconomic environment by resorting to value-proposition and menu innovation across all regions to boost its performance.
The low-priced ‘dollar menu’, large scale food events and strong local activities will be in the cards for the rest of 2013 to drive traffic. Delivery and drive-thru initiatives are also gaining momentum. As of now, McDonald’s is slowly but steadily moving in a positive direction, at least in the domestic arena.
McDonald’s currently carries a Zacks Rank #3 (Hold). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN), AFC Enterprises Inc. (AFCE) and Burger King Worldwide Inc. (BKW), all carrying a Zacks Rank #2 (Buy).
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