Quick Thoughts – Another Challenging Quarter for MCD
We suspect that expectations were modest for MCD’s Q1 results given the weather in the U.S., recent trends ex-weather and the company’s cautious commentary on margins contained in its last sales release. We believe that the stock’s recent move higher was more a function of sector rotation dynamics, rather than any optimism surrounding the company’s near-term business momentum.
Given this setup, Q1 results were appropriately underwhelming, with the company delivering below consensus results on both EPS ($0.03) and revenue (~$30 million). Sluggish U.S. results (certainly related in part to the weather, but a challenging competitive environment that appears to be getting more difficult on the margin likely played no small role) weighed on global comparable sales (+0.5%, -1.7% in the U.S.). Constant currency revenue growth was +3%, with constant currency EBIT increasing +1%, so we saw negative leverage as we move through the income statement.
Currency weakened EPS results by $0.03 in the quarter, but even on adjusted basis EPS declined year over year against a fairly easier comparison (+2%) – EPS comparisons stiffen in Q2 and Q3 (+5% and +6%), calling into question the forecasted EPS growth contemplated by consensus (+6% in Q2 and +7% in Q3). With consensus estimates still too high in our view, we see little reason to be involved in the name at current levels.
While the stock was indicated lower initially, we suspect the commentary surrounding (modestly) positive global comparable sales in April may have helped buoy shares in early trading.
With the U.S. operations a bit of albatross due to consumer frugality and incremental competition, it is difficult at this point to build a fundamental investment case. Having said that, the risk to being short may lie in the company levering up to repurchase shares in a much more aggressive fashion or some other corporate action (incremental cost savings, for example). We see any opportunity along these lines as likely more weighted to the second half, just as we could potentially see more aggressive input cost inflation impact operating results. Bottom line for us is that we continue to see MCD as a source of funds, and with the share price over $100, a less than compelling risk/reward profile over the next 6-9 months.