MCD and SBUX – Opposite Ends of the Growth Spectrum
Both MCD and SBUX printed EPS results yesterday and, expectations aside, the two prints stand in stark contrast to each other.
- MCD beat consensus EPS by $0.01, but came in light of consensus revenue, with year over year growth of 2%. Global comps declined 0.1% in the quarter and rose 0.2% for the year. In an early look at 2014, the company suggested that global comparable sales were expected to be “relatively” flat in January.
- SBUX exceeded consensus as well ($0.71 versus $0.69) and similarly missed consensus revenue expectations ($4.24 billion versus $4.29 billion). However, global comps increased 5.0% (5.9% consensus). Margins expanded significantly year over year.
Our view is that MCD will struggle to grow sales, margins and EPS in meaningful fashion in 2014. A number of key markets (most notably the U.S.) remain weak, pricing remains elusive (the food at home inflation index, against which MCD seeks to price, will likely come in weaker again in ’14), currency remains a headwind (full year ’14 negative impact of $0.05/$0.06 per share at prevailing rates), increased labor costs (minimum wage increases) and an 8% increase in G&A expenses (as compared to down 3% in ’13) will all conspire to make 2014 resemble 2013 for MCD, which is to say, uninspiring for investors.
- It is also, therefore, our view that it will be difficult for MCD to see significant multiple expansion in this environment, making the company a relative underperformer in an up tape.
- Having said that, MCD has some staples-like properties (yield, stability of cash flows) that might attract investor dollars in a more unsettled stock market environment.
- The stock has been resilient below $95 per share (as it was yesterday, despite the weaker than expected sales result), so we believe that the name makes for a better short higher (we know, glimpse of the obvious there).
- We know that sounds a bit like talking out of both sides of our mouth, but the overarching message is “avoid”, with some caveats as to what might drive some modest outperformance at various points during the year and under certain market conditions.
SBUX shares have been weak along with the balance of the U.S. restaurant group, but yesterday’s EPS results should allay some of investors’ concerns surrounding the strength of the franchise and the company’s ability to deliver solid results in a difficult operating environment. While the valuation certainly doesn’t represent a bargain, the company remains one of the premier global growth stories across consumer sectors. We suspect that the SBUX EPS report will be an outlier among restaurants this period (in a good way), and we further believe an outlier among some of the higher multiple restaurant concepts as well.
Growth versus no growth – a tale of two companies. Two global franchises, one currently resonating with consumers and one that spent much of its conference call trying to explain how it was going to find its voice and become more relevant (MCD). We don’t expect a similar level of absolute performance in SBUX in ’14 as the company delivered in ‘13, but we continue to see it as one of our preferred names in the restaurant space as earnings move into the rear view mirror.