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Factors Setting the Tone for McDonald's (MCD) Q3 Earnings

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McDonald's Corp. (MCD - Free Report) is set to report its third-quarter 2018 financial numbers on Oct 23, before the opening bell.

In the last reported quarter, the company delivered a positive earnings surprise of 3.7%. Also, McDonald's earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 4.7%.

How are Estimates Faring?

Let’s look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company prior to the release. For the quarter under review, the Zacks Consensus Estimate is pegged at $1.99, which remained stable over the past 30 days. This reflects a gain of 13.1% from $1.76 in the year-ago quarter. Revenues are expected to be $5,276 million, down 8.3% year over year.

Top Line Downtrend to Persist

McDonald’s revenues, which have been hurting the company’s performance for quite some time, are likely to continue declining in third-quarter 2018. In the second quarter of 2018, the company’s revenues decreased 12% year over year, following a 9% fall in the preceding quarter. In the fourth, third, second and the first quarter of 2017, McDonald’s revenues declined 11.4%, 13%, 7% and 4.7%, respectively. This downturn reflects the impact of the company’s strategic refranchising initiatives.

However, McDonald’s reported comparable sales growth for 12 straight quarters. This momentum is likely to continue in third-quarter 2018 as well. In order to drive comps in the United States, representing about 40% of the company’s business, McDonald’s intends to improve its focus on increasing guest count. In this regard, the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings.

Furthermore, the company is undertaking digital initiatives to better serve customers, with nearly all its U.S. restaurants now using digital menu boards. In addition, McDonald’s is consistently trying to improve its performance in the International Lead Markets, which include Australia, Canada, France, Germany and the UK.

Bottom Line Likely to be Impressive

McDonald’s earnings in the third quarter are likely to improve on a year-over-year basis. Although the refranchising initiatives are hurting the company’s top line, it is facilitating earnings growth. Management’s re-franchising strategy involves a shift toward a higher percentage of franchised restaurants. The reduction in ownership, such as re-franchising, weighs on near-term revenues as it replaces company-operated sales by franchised sales.

McDonald's Corporation Price, Consensus and EPS Surprise

McDonald's Corporation Price, Consensus and EPS Surprise | McDonald's Corporation Quote

What Does the Zacks Model Unveil?

Our proven model does not show that McDonald’s is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

McDonald’s has an Earnings ESP of -0.69%. Although, the company’s Zacks Rank #3 increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks With Favorable Combination

Here are a few other stocks from the Restaurant space that investors may consider as our model shows that they have the right combination of elements to post an earnings beat in the third quarter:

BJ's Restaurants, Inc. (BJRI - Free Report) has an Earnings ESP of +4.03% and a Zacks Rank of 1.

The Wendy's Company (WEN - Free Report) has an Earnings ESP of +0.84% and a Zacks Rank #2.

Darden Restaurants, Inc. (DRI - Free Report) has an Earnings ESP of +0.20% and a Zacks Rank of 2.

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