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Can McDonald's (MCD) Keep its Earnings Streak Alive in Q3?

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We expect burger giant McDonald's Corp. (MCD - Free Report) to beat expectations when it reports third-quarter 2016 numbers on Oct 21, before the opening bell.

Last quarter, McDonald's posted a 5.07% positive earnings surprise. In fact, the company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 6.35%.

Let’s see how things are shaping up for this announcement.

MCDONALDS CORP Price and EPS Surprise



Why a Likely Positive Surprise?

Our proven model shows that McDonald's is likely to beat earnings because it has the perfect combination of the two key ingredients.

Zacks ESP: Earnings ESP for McDonald's stands at +0.68% because the Most Accurate estimate is $1.49 while the Zacks Consensus Estimate is pegged lower at $1.48. A favorable Earnings ESP serves as a meaningful indicator of a likely positive earnings surprise.  

Zacks Rank: McDonald's currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of McDonald's Zacks Rank #3 and +0.68% Earnings ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

McDonald’s comps have improved in its key regions over the last few quarters, marking a trend that will likely continue in the third quarter. This appears to be the result of the company’s strategic efforts to boost sales. It has been focusing on menu innovation, introduction of value meals, efficient marketing and promotions, and improved service to drive top line.

Further, the company’s All Day Breakfast platform – which has been immensely popular – is expected to continue being a success, thereby contributing to revenues.

Meanwhile, McDonald’s is also working on a digital strategy and mobile technologies to lower costs. These initiatives should aid comps as well as profits in the to-be-reported quarter.

However, a slowdown in emerging markets and soft industry growth could dent sales while high costs along with negative currency translation might hurt the quarter’s profits.

Other Stocks to Consider

McDonald's is not the only company looking up this earnings season. Here are some other companies to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

The Cheesecake Factory Incorporated (CAKE - Free Report) has an earnings ESP of +1.64% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Wendy's Company (WEN - Free Report) has an earnings ESP of +10.00% and a Zacks Rank #2.

Buffalo Wild Wings Inc. has an earnings ESP of +0.80% and a Zacks Rank #3.

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