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McDonald's third-quarter earnings: What to expect
MARKETWATCH 10:09 AM ET 10/19/2016
Symbol Last Price Change
MCD 111.3 +0.05 (+0.04%)
QUOTES AS OF 01:49:40 PM ET 10/19/2016
The excitement about all-day breakfast may be starting to wane

McDonald's Corp. (MCD) is expected to report third-quarter earnings on Friday before the market opens.

McDonald's (MCD) got a boost from the introduction of all-day breakfast back in October 2015, but there are questions now whether it can sustain results over the long term. Other issues, including Brexit, could also stifle earnings.

McDonald's (MCD) shares have an average overweight rating with a stock price target of $129.04, 16% higher than the Tuesday closing price.

See also:Executive shake-up expected at McDonald's(MCD) this week (http://www.marketwatch.com/story/executive-shakeup- expected-at-mcdonalds-this-week-2016-10-16)

Here's what to expect:

Earnings: Analysts surveyed by FactSet expect earnings per share of $1.48, up from $1.40 for the same period last year.

Analysts polled by Estimize, a software platform that crowdsources estimates from buy-side analysts, hedge-fund managers, academics and others, is expecting $1.50 per share.

Revenue: Analysts polled by FactSet expect revenue of $6.28 billion, down from $6.62 billion for the same period last year.

Analysts polled by Estimize expect revenue of $6.3 billion.

Share price: McDonald's(MCD) shares are down 5.8% for the year so far while the S&P 500 index is up 4.7% for the year so far. The Dow Jones 30 Industrial Average is up 4.2% for 2016 to date.

See also: McDonald's(MCD) to book $130 million restructuring charge (http://www.marketwatch.com/story/mcdonalds-to-book- 130-million-restructuring-charge-2016-10-13)

(https://sw.graphiq.com/w/7py54OgyISN)

Other issues: All-day breakfast generated lots of excitement after its October launch, but revenue has since missed estimates (http://www.marketwatch.com/story/mcdonalds-shares-fall-after-revenue-same-store-sales-miss-expectations-2016- 07-26). U.S. same-store sales growth last quarter grew 1.8%, also missing expectations.

"Despite five quarters of earnings growth, mostly brought about by share buybacks, revenue growth has been declining for eight consecutive quarters," said Estimize in its earnings preview note published Sunday. "Popular menu introductions such as all-day breakfast and the McPick 2 have led to an increase in foot traffic, but not prolonged traffic, and they haven't necessarily helped with the sales of other items."

Same-store sales are also a concern for Nomura analysts. Based on their latest McDonald's Franchisee Survey, they're lowering their same-store sales growth forecast to 0.2%. The FactSet consensus is for 1.3% growth.

Among the reasons cited by franchisees for the third-quarter same-store sales result are the year-over-year comparisons.

See also: McDonald's(MCD) problem: Just one in five millennials has tried a Big Mac (http://www.marketwatch.com/story/ mcdonalds-problem-just-one-in-five-millennials-has-tried-a-big-mac-2016-10-07)

"Last year's introduction of all-day breakfast in the fall of 2015 was extremely successful and we are going to be comping over some very high increases, especially from October and November of 2015," said one franchisee.

Respondents cited discounts as a same-store sales hindrance, and some suggested that the menu be simplified.

Nomura rates McDonald's(MCD) shares neutral. Analysts lowered their price target to $122 from $129 in a note published Tuesday.

SunTrust Robinson Humphrey believes the company will use its McPick 2 value deals to sustain same-restaurant sales growth. Analysts expect 1.5% same-restaurant sales gains, exceeding expectations.

See also:McDonald's China franchise deal could fetch up to $2 billion up front (http://www.marketwatch.com/story/ mcdonalds-china-franchise-deal-could-fetch-up-to-2-billion-up-front-2016-10-03-8103136)

Analysts note that there's been a slowdown across the restaurant industry driven by record sales growth of 8.6% in 2015, which creates difficult comparisons, and a shift to food purchases at grocery stores.

Still, they are bullish about McDonald's(MCD).

"We view McDonald's(MCD) as the best positioned in our coverage, due to a combination of scale (sourcing and marketing) and brand equity around value (which McDonald's(MCD) is tapping into with its national 'McPick 2' value platform," SunTrust wrote in a note published last Wednesday.

SunTrust rates McDonald's(MCD) shares buy with a $138 price target.

SunTrust forecasts flat same-store sales in China, and Estimize believes Brexit could have a negative impact on results.

See also:Chipotle may be the worst restaurant for investors (http://www.marketwatch.com/story/chipotle-may-be-the- worst-restaurant-for-investors-2016-10-18)

"Another headwind may be a broader pullback in Europe after the Brexit ruling, and prolonged currency headwinds," Estimize wrote. "McDonald's(MCD) has a huge presence in Europe with the region accounting for 37% of its total revenue."

-Tonya Garcia; 415-439-6400; [e-mail]


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10-19-161009ET
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