We remain Neutral on restaurant company
). Although the world's biggest burger chain could not surpass
the Zacks Consensus Estimate on both lines in the second quarter
of 2013, we still believe that the company has strong value.
Why the Reiteration?
On Jul 22, 2013, McDonald's reported second-quarter 2013 earnings
of $1.38 per share, which missed the Zacks Consensus Estimate by
1.4%. We believe that a higher-than-expected adverse impact of
currency translation of 2 cents per share led to the earnings
miss. In fact, the negative impact of currency translation is
expected to persist as management guided a negative impact of 7-9
cents on full year earnings.
McDonald's revenues of $7.1 billion barely met the estimate in
the quarter. The comps scenario has also not been quite
encouraging since the past few months mainly due to weak consumer
spending environment. Global comps in the second quarter, though
positive, were below the year-ago level.
McDonald's has become extremely vulnerable to macroeconomic
headwinds like debt concerns in Europe, decelerating growth in
Asia and intense competition in the U.S. The company expects its
performance in the second half of 2013 to be under pressure due
to a sluggish business environment.
Further, margin pressure has also added to the company's concern.
Most of its sales building measures are value-oriented, which
could prove detrimental to margins if exercised on a long-term
However, despite these unenthusiastic facts, some positives
prevent us from being too pessimistic on the stock. McDonald's --
the world's largest chain of fast food restaurants - is
consistently striving to bounce back amid a challenging
macroeconomic environment by resorting to value-proposition and
menu innovation across all regions to boost its performance.
The low-priced 'dollar menu', large scale food events and strong
local activities will be in the cards for the rest of 2013 to
drive traffic. Delivery and drive-thru initiatives are also
gaining momentum. As of now, McDonald's is slowly but steadily
moving in a positive direction, at least in the domestic arena.
McDonald's currently carries a Zacks Rank #3 (Hold). Other
players in the restaurant industry, which look attractive at
current levels, include The
AFC Enterprises Inc.
Burger King Worldwide Inc.
), all carrying a Zacks Rank #2 (Buy).
AFC ENTERPRISES (AFCE): Free Stock Analysis
BURGER KING WWD (BKW): Free Stock Analysis
MCDONALDS CORP (MCD): Free Stock Analysis
WENDYS CO/THE (WEN): Free Stock Analysis
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