One of the leading hamburger chains, McDonald's Corp. (MCD) is set to report third-quarter 2014 results on Oct 21, 2014. In the last quarter, the company posted a negative surprise of 2.10% owing to a decline in comps in the U.S and Europe. Let’s see what’s in store this season.
Factors to Consider
After posting significant decline in comps for two consecutive months (July and August), the company expects third quarter earnings per share to decline year over year by 15 to 20 cents. The Zacks Consensus Estimate of 75 cents represents a year-over-year decline of 11 cents.
The sluggish comps reflect adverse publicity faced by the company in Jul 2014 on account of improper food handling practices by its former supplier, Shanghai Husi. This division of OSI Group LLC, Shanghai Husi Food Co. was reportedly found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. McDonald’s noted that this incident affected consumer confidence in China, Japan and certain other markets, thereby lowering comps in the Asia/Pacific, Middle East and Africa (APMEA) region.
Apart from this, the company is experiencing dismal comps in Europe. It is facing pressure from consumer safety regulators in Russia who have reportedly kept more than 100 of McDonald’s restaurants under inspection. Also, they have reportedly shuttered a dozen of its units citing multiple violations of sanitary rules. In fact, given the scenario, the company expects weak consumer sentiment to negatively impact sales and profitability in this market in the third quarter.
Moreover, difficult economic conditions and stiff competition in the domestic market compound woes. The region has not been able to post positive comps since Oct 2013 mainly due to heightened competition and a few unwise decisions that have slowed down service. Given the sluggish performance in the domestic market, the company expects soft revenues and hence poor margins in the U.S. in the third quarter.
Owing to the weak comps experienced in all its regions, estimates for the company moved downwards over the last 60 days.
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.
Negative Zacks ESP: The company’s Earnings ESP stands at -0.73%. This is because the Most Accurate estimate is $1.36, while the Zacks Consensus Estimate stands higher at $1.37.
Zacks Rank: McDonald's has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Burger King Worldwide, Inc. (BKW) has an Earnings ESP of +3.70% and a Zacks Rank #2 (Buy).
Dunkin' Brands Group, Inc. (DNKN) has an Earnings ESP of +2.13% and a Zacks Rank #3 (Hold).
Buffalo Wild Wings Inc. (BWLD) has an Earnings ESP of +0.94% and a Zacks Rank #3.
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