Leading quick service restaurant (QSR) McDonald's Corp. (MCD) is set to report second-quarter 2014 results on Jul 22, before the opening bell.
In the last quarter, the company missed the Zacks Consensus Estimate of earnings by 1.6%, primarily due to higher expenses. Let’s see how things are shaping up for the upcoming announcement.
Factors to Consider this Quarter
McDonald’s failed to beat expectations last quarter due to sluggish comps in the domestic market, primarily because of inclement weather affecting most parts of the U.S. With no marked improvement in comps till April and May, we believe that comps will continue to remain under pressure in the second quarter.
The gloomy market outlook is also a major concern for this quick service chain. According to Black Box Intelligence and People Report, restaurant comps turned negative in June and traffic went down substantially. Also, the MillerPulse Report stated that same-store sales and traffic plunged far below year-ago figures.
Additionally, as U.S. customers are increasingly adopting healthy food habits, McDonald’s faces the challenge of offering innovative menu variations to cater to this section of customers.
However, despite such a gloomy outlook in the U.S., we believe menu innovation, marketing initiatives and affordable pricing will be able to drive comps growth in Asia/Pacific, Middle East and Africa (APMEA) as well as in Europe.
Earnings Whispers?
Our proven model does not conclusively show that McDonald's is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP for McDonald's is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.43.
Zacks Rank: McDonald's has a Zacks Rank #3 (Hold), which when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Chipotle Mexican Grill, Inc. (CMG), with an Earnings ESP of +0.98% and a Zacks Rank #2 (Buy).
Domino's Pizza, Inc. (DPZ), with an Earnings ESP of +1.54% and a Zacks Rank #2.
Buffalo Wild Wings Inc. (BWLD), with an Earnings ESP of +5.04% and a Zacks Rank #3.
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