We expect McDonald's Corp.MCD to beat expectations when it reports second-quarter 2015 on Jul 23 before the market opens. Last quarter, it posted a positive earnings surprise of 4.76%. Meanwhile, the company has beaten earnings estimates in three of the trailing four quarters and has an average positive earnings surprise of 3.82%. Let's see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that McDonald's is likely to beat earnings because it has the right combination of two key components.
Zacks ESP:Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.63%. This is meaningful and indicates a likely earnings surprise.
Zacks Rank: McDonald's has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of McDonald's' Zacks Rank #3 and +1.63% ESP makes us confident of an earnings beat.
What's Driving the Better-Than-Expected Earnings?
The company has been posting sluggish comps over the past few quarters due to negative guest traffic in all its major segments. The food safety issue in China in Jul 2014 has been a major deterrent to the company's sales in the Asia/Pacific, Middle East and Africa region. Also, issues in other key regions have been negatively impacting its comps. However, the company has undertaken recovery strategies to regain consumer confidence in the affected regions and revive sales in all its served markets. These include product innovation, offering a value menu, rolling out more limited-time offerings, extending the beverage line and executing stronger marketing strategies.
The company has taken initiatives to reinvigorate sales. From trimming complicated menus to speeding up service to testing customized burgers and sandwiches to competing with other popular restaurants, the company is leaving no stone unturned to regain consumer confidence at all its key operating regions. McDonald's is also working on a digital strategy and mobile technologies to further lower costs. These initiatives would aid comps as well as profits in the soon-to-be reported quarter.
Notably, comps have declined in the U.S and Asia/Pacific, Middle East and Africa (APMEA) in two months of the second quarter. However, it grew in Europe on strong performance in the UK and a slightly positive performance in Germany and France.
Steve Easterbrook, the chief executive officer (CEO) of the company, also announced initial steps of the company's turnaround plan in May 2015 that included restructuring of its worldwide operation and focus on increasing franchising and lowering general and administrative expenses. Nevertheless, the company expects first half results to be soft.
Other Stocks to Consider
Other stocks in the restaurant industry that have both a positive earnings ESP and a favorable Zacks Rank include:
Jack in the Box Inc. JACK with an Earnings ESP of +2.74% and a Zacks Rank #1 (Strong Buy).
Dave & Buster's Entertainment, Inc. PLAY with an Earnings ESP of +4.55% and a Zacks Rank #1.
BJ's Restaurants, Inc. BJRI with an Earnings ESP of +2.56% and a Zacks Rank #3 (Hold).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.