McDonald's (MCD) Up 6.2% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for McDonald's Corporation MCD. Shares have added about 6.2% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

McDonald's Tops Q1 Earnings on Solid Comps Growth

McDonald's posted robust results in the first quarter of 2017, wherein both the bottom line and the top line outpaced the Zacks Consensus Estimate.

Earnings and Revenue Discussion

Earnings per share (EPS) of $1.47 surpassed the Zacks Consensus Estimate of $1.32 by 11.4 % and improved 18% from the year-ago quarter. Foreign currency translation had a negative impact of $0.02 per share on earnings in the quarter. Notably, at constant currency, earnings grew 19% year over year.

Revenues of $5.68 billion declined 4% year over year, mainly due to the impact of refranchising and currency headwinds. At constant currency, the figure declined 3%. However, the same surpassed the Zacks Consensus Estimate of $5.48 billion by nearly 4%.

Behind the Headlines Numbers

In the quarter, revenues at company-operated restaurants declined 9.1% to $3.41 billion. But revenues at franchise-operated restaurants increased 5.3% to $2.26 billion.

Global comps grew 4%, supported by positive comps across all the segments. This marked the seventh consecutive quarter of positive comparable sales. Moreover, comps compared favorably with last quarter’s increase of 2.7%.

Segment Details

Effective Jul 1, 2015, McDonald's began reporting results under four segments: U.S. (the company's largest segment), International Lead Markets (mature markets including Australia, Canada, France, Germany and the U.K.), High-Growth Markets (markets that have high restaurant expansion and franchising potential such as China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands) and Foundational Markets (the remaining markets in McDonald's system).

U.S.: Comps grew 1.7% in the first quarter, on the back of the expansion of All Day Breakfast offerings, along with the Big Mac and beverage value promotions. Notably, this segment continues to strengthen its foundation as it executes strategic menu, value and convenience initiatives. Moreover, comps growth compared favorably with the prior quarter decline of 1.3%.

Segment operating income also jumped 13%, mainly driven by savings from the company's recent G&A and refranchising initiatives.

Going forward, the segment aims to continue focusing on its efforts to drive guest count growth.

International Lead Markets: Comps at this segment grew 2.8%, driven by strong performance in the U.K. and Canada's successful launch of All Day Breakfast. Notably, comps were flat as compared to last quarter.
Operating income was up 2%, including the impact of foreign exchange headwinds. At constant currency, the figure was up 6% on the back of sales-driven improvements in franchised margin dollars across most markets.

High-Growth Markets: Comps grew 3.8% led by strong performance in China as well as positive results across the entire segment. We note that comps had witnessed growth of 4.7% last quarter.

The segment's operating income rose 36% (38% in constant currencies) on the back of lower depreciation expense due to the accounting treatment of the pending sale of the China and Hong Kong businesses. Pprior year VAT reform in China also drove the results.

Foundational Markets: Comps in Foundational Markets jumped 10.7% and operating income increased significantly primarily owing to strong sales in Japan along with solid results across the segment's other geographic regions. However, the figure was lower than the comps growth of 11.1% last quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been nine upward revisions for the current quarter compared to one downward.

McDonald's Corporation Price and Consensus

McDonald's Corporation Price and Consensus | McDonald's Corporation Quote

VGM Scores

At this time, the McDonald's stock has a great Growth Score of 'A', though it is lagging a bit on the momentum front with a 'B'. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

Estimates have been broadly trending upward for the stock. The magnitude of these revisions also looks promising. Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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