McDonald's Beats on Both Lines

McDonald’s Corporation’s ( MCD - Analyst Report ) fourth quarter 2012 earnings of $1.38 per share beat the Zacks Consensus Estimate as well as the year-ago earnings of $1.33 per share. Improvement in top-line coupled with cost containment efforts boosted earnings.

Revenues grew 2.0% year over year to $6,952.1 million during the quarter, ahead of the Zacks Consensus Estimate of $6,878.0 million.

For full year 2012, both earnings per share of $5.36 and revenues of $27.6 billion grew 2% year over year. Global comparable sales (comps) inched up 0.1% while operating income exhibited a considerable increase of 4%, thanks to steep decline in overheads.

Behind the Headlines Number

In the fourth quarter, revenues from company-operated restaurants increased 2.0% to $4,658.4 million, while the same from franchise-operated restaurants was up 3.0% to $2,293.7 million.

In the United States, comps nudged up 0.3%. The comps in the quarter were backed by the combination of everyday value-menu as well as premium offerings. Operating income for the segment was flat year over year.

Europe witnessed a comps decline of 0.6% due to reduced guest count and strong year-over-year comparison. Austerity measures arising out of lingering debt concerns probably made cash-stripped customers dine out less, which in turn took a toll on footfall. The contribution from value-menu, food events and restaurant reimaging were offset by the ongoing concerns in region.

However, operating income saw a surge of 5% (up 7% in constant currencies) in Europe mainly driven by the strong performance from the UK and Russia.

In APMEA, comps slackened 1.7%. Although Australia put up a healthy show, Japan and some other markets continue to be a dampener. Japan is struggling to recover from the after-effects of last year’s natural calamities, which is restricting consumers to dine out.

Operating income in APMEA was flat (down 1% in constant currencies) mainly due to tough year over year comparison.

Outlook

For the long term, The Oakbrook, Illinois-based company reaffirmed its target of 3–5% top line, 6–7% operating income and high teens growth in return-on-invested capital on an annualized basis.

For the month of January, management expects global comps to be negative. Also the company expects near-term top- and bottom-line growth to reel under pressure.

For 2013, McDonald’s plans to spend about $3.2 billion, up from $2.9 billion in 2012, given plans for 1,500 -1,600 new restaurant openings and over 1,600 reimages

Our Take

After relatively weak performances in the recent past and a monthly comps decline in October (not seen in a decade), this fast food giant bounced back in the reported quarter. Its above-par performance despite tough comparisons and ongoing economic concerns impresses us.

The company had to resort to a series of initiatives to counter comps slowdown. We prefer the company’s consistent efforts to emerge out of its tough time. Re-emphasis on value menu, posting calorie content on restaurant menu and rollout of drive-thru menus nationwide to attract more nutrition conscious traffic and management shuffling in the US division effective Dec 1, 2012 should bode well in near future.

Investors should also note that McDonald’s will likely face easy comparisons across the globe as the year 2013 progresses. Constant dividend hike irrespective of the economic peaks and valleys also calls for the company’s inherent strength.

However, McDonald’s is still vulnerable to a fragile macro economy. The company has little pricing power in Europe due to wavering consumer confidence. With increased focus on value proposition along with less pricing power and increasing investments towards media, margins will likely suffer, going ahead.

McDonald’s currently carries a Zacks Rank #3 (Hold). Among its peers -- The Wendy's Co. ( WEN - Analyst Report ) declared its preliminary fourth quarter and full year 2012 results. On a preliminary basis, the company’s fourth-quarter 2012 adjusted earnings were ahead of the Zacks Consensus Estimate as well as the year-ago earnings per share. Its revenues, although up 2.4% year over year, fell short of the Zacks Consensus Estimate.

Another peer, Brinker International Inc.’s ( EAT - Analyst Report ) earnings per share in second-quarter 2013 were in line with the Zacks Consensus Estimate while its revenues missed the same.

Yet another peer Yum! Brands Inc. ( YUM - Analyst Report ) will likely report its fourth quarter earnings on Feb 4.