Earnings Preview: McDonald's

McDonald’s Corp. (MCD - Analyst Report) is slated to release its fourth-quarter and fiscal 2011 results on January 24, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is $1.29 per share on revenue of $6.82 billion.  For 2011, the Zacks Consensus Estimates of earnings and revenue are $5.23 and $27.0 billion, respectively.

The current Zacks Consensus Estimates for the fourth quarter and fiscal 2011 reflect a year-over-year growth of 12.17% and 14.01%, respectively.

Earnings Surprise

With respect to earnings surprises, over the trailing four quarters, McDonald’s has outperformed the Zacks Consensus Estimate in three out of four quarters in the range of negative 0.86% to 1.40%. The average earnings surprise was positive 1.72%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third Quarter Recap

Oak Brook, Illinois-based McDonald’s posted third-quarter 2011 earnings of $1.45 per share, beating the Zacks Consensus Estimate of $1.43. Reported earnings increased 12% from $1.29 per share in the prior-year quarter.

McDonald’s reported revenues of $7.17 billion, up 14% year over year, exceeding the Zacks Consensus Estimate of $7.03 billion. Excluding the positive impact of foreign currency translation, revenues grew 8.0% year over year.  

Earnings Estimate Revisions – Overview

Ahead of the earnings release, we have noticed a positive sentiment prevailing around the stock.  

Agreement of Estimate Revisions

In the last 7 days, one out of 21 analysts covering the stock increased the estimate for the fourth quarter. Of the 24 analysts, one analyst raised the estimates for fiscal 2011 and 2012 while none moved in the opposite direction.

Magnitude of Estimate Revisions

There has been no change in the estimates in the last 30 days. Therefore, the analysts expect the company to report in line.

Our Take

We reiterate our long-term Neutral rating on McDonald’s. A strong balance sheet, consistent growth in revenue as well as earnings, solid product line-up and an exposure to faster-growing international markets give the company an edge over its peers. Management expects to start the year 2012 with 3% pricing and is likely to take additional increases during 2012, which will boost its bottom line. We do not expect any adverse effect inconsumer behavior following this incrementgiven the brand’s huge acceptance among consumers.  

The best part is that, despite the implementation of austerity measures, no signs of slowdown have been witnessed in Europe till now. Moreover, we expect the company to report strong sales in the month of December as severe winter hurt sales in the U.K. and Germany as well as in the U.S. in the same month last year.

However, for the fourth quarter, McDonald’s will likely experience minimal benefit from foreign currency translation while on a positive note, inflationary pressure will ease out. Coming to 2012, lesser commodity inflation in Europe stemmed from favorable chicken and dairy costs will be mitigated by higher selling, general & administrative expenses (up 7%). Besides, heightened commodity costs environment will be intact in the U.S.

McDonald’s currently retains a Zacks #2 Rank (short-term Buy rating). One of McDonald’s primary competitors, Yum! Brands Inc. (YUM - Analyst Report), will announce its fourth-quarter 2011 results on February 1.

Read the full analyst report on YUM

Read the full analyst report on MCD