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Refranchising Efforts to Aid McDonald's (MCD) Q4 Earnings

Zacks Equity Research

McDonald's Corporation MCD is set to report fourth-quarter 2018 financial numbers on Jan 30, before the opening bell.

We believe that the company’s refranchising initiatives are likely to have boosted earnings in the fourth quarter, even though it has the possibility of hurting revenues in the quarter.

However, McDonald's efforts to strengthen its position through various sales-building initiatives, along with an increased focus on franchising, posit the company for growth. Backed by better-than-expected earnings for 17 consecutive quarters, shares of McDonald’s have gained 4.8% in the past year, outperforming the industry’s 3.6% growth.

Let us find out how the company’s top and bottom lines will shape up in fourth-quarter results.

Top-Line Downtrend to Continue

McDonald’s declining revenues have been weighing on the company’s overall performance for quite some time. In the third quarter of 2018, its revenues declined 7% year over year, following 12% and 9% fall in the second and first quarters of 2018, respectively. Overall, revenues declined 9% year over year in the first nine months of 2018. This trend is likely to have continued in the fourth quarter as well. Further, the top line declined 11.4%, 13%, 7%, and 4.7% in the fourth, third, second and first quarters of 2017, respectively.

This downturn reflects the impact of the company’s refranchising initiatives. During the last reported quarter, company-operated restaurants’ revenues declined 18% year over year to $2,511 million. However, the same at franchise-operated restaurants improved 6% to $2,858.4 million.

The Zacks Consensus Estimate for company-operated restaurants’ revenues in the fourth quarter marks a 10.5% year-over-year decline while franchise revenues are likely to increase 4.8% from the year-ago quarter.

The consensus estimate pegs net revenues at $5.2 billion for the to-be-reported quarter, reflecting a 3.4% fall from the prior-year quarter.

Bottom Line Likely to Improve

McDonald’s earnings in the fourth quarter are likely to improve on a year-over-year basis. In fact, in the first nine months of 2018, earnings grew 4% year over year. Although refranchising initiatives are hurting the company’s top line, it is facilitating earnings growth. Management’s re-franchising strategy involves a shift toward a higher percentage of franchised restaurants. The reduction in ownership weighs on near-term revenues as it replaces company-operated sales by franchised sales.

Subsequently, the consensus estimate pegs fourth-quarter earnings at $1.89, reflecting a 10.5% increase from the fourth quarter of 2017.

What Does the Zacks Model Unveil?

Our proven model does not show that McDonald’s is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

McDonald’s has an Earnings ESP of -0.73%. Although the company’s Zacks Rank #3 increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's Corporation Price and EPS Surprise


McDonald's Corporation Price and EPS Surprise | McDonald's Corporation Quote

Stocks to Consider

Here are a few stocks from the Retail-Wholesale space that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the fourth quarter:

Amazon AMZN has an Earnings ESP of +0.68% and a Zacks Rank #2 at present. The company is scheduled to report quarterly results on Feb 7.

Caseys General Stores CASY has an Earnings ESP of +18.15% and it currently sports a Zacks Rank #1. The company is expected to report quarterly results on Mar 6.

RH RH has an Earnings ESP of +15.19% and it presently flaunts a Zacks Rank #1. The company is expected to report quarterly results on Mar 26.

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