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Why Is McDonald's (MCD) Down 0.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for McDonald's (MCD). Shares have lost about 0.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is McDonald's due for a breakout? 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 drivers.

McDonald's Q1 Earnings Lag Estimates, Comps Decline

McDonald's reported first-quarter 2020 results, wherein earnings missed the Zacks Consensus Estimate but revenues beat the same. However, both top and bottom lines declined year over year. 

Adjusted earnings came in at $1.47 per share, which missed the Zacks Consensus Estimate of $1.59. However, the bottom line also declined 15% year over year. Meanwhile, foreign currency translation had a negative impact of 2 cents per share on earnings in the quarter under review.

Revenues & Comps Discussion

In the first quarter, revenues of $4,714.4 million beat the Zacks Consensus Estimate of $4,696 million. However, the figure declined 6% year over year. This downtrend can primarily be attributed to the coronavirus pandemic. Moreover, on a constant-currency basis, the top line decreased 5% on a year-over-year basis.

At company-operated restaurants, revenues came in at $2,025.8 million, down 10% year over year. Moreover, the same at franchise-operated restaurants declined 4% to $2,608 million.

In first two months of the quarter under review, global comparable sales increased 7.2%. In the second-half of March global comps declined sharply due the pandemic. The company ended the quarter with comps decline of 3.4% against a gain of 5.4% in the prior-year quarter. Notably, comps declined in the first quarter after reporting positive comps in the preceding 19 quarters. In fourth-quarter 2019, comps were also up 5.9%.

Solid Comps Across Segments

U.S.: Comps at this segment grew 0.1% in the first quarter, against a rise of 4.5% in the prior-year quarter. Deployment of Experience of the Future, strength in core menu items and successful national and local deal offerings drove the segment’s comps.

International Operated Markets: Comps at this segment declined 6.9% year over year, against a gain of 6% in the year-ago quarter. 

International Developmental Licensed Segment: The segment’s comparable sales decreased 4.3% in the first quarter. In the prior-year quarter, the segment’s comps had improved 6%.

Other Information

In an effort on preserve financial flexibility to tide over the current situation, the company has suspended the share repurchase program. It has enhanced cash position with $6.5 billion of new debt financing. The company has also reduced capital expenditures by $1 billion for 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted -12.37% due to these changes.

VGM Scores

Currently, McDonald's has a subpar Growth Score of D, however its Momentum Score is doing a lot better 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, McDonald's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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