Markets

Will China Issues Impact McDonald's (MCD) Q3 Earnings?

One of the leading hamburger chains, McDonald's Corp.MCD is set to report third-quarter 2015 results on Oct 22, 2015. Last quarter, the company posted a positive earnings surprise of 2.44%. Meanwhile, the company has posted positive earnings surprises in all the trailing four quarters with an average positive earnings surprise of 4.96%. Let's see what's in store this season.

Factors to Consider

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. Although the restaurant chain expects to post positive comps in the third quarter, driven by International Lead Markets and its recovery from the 2014 APMEA supplier issue in China, a drastic turnaround is unlikely due to the slowdown in the Chinese economy. Also, negative currency translation is expected to hurt profits in the soon-to-be reported quarter as has been the case over the past few quarters.

However, the company has taken a number of 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 third quarter. We would like to remind investors that comps in the second quarter at all its key regions had improved compared to the first quarter.

On the cost front, the company expects margins to remain under pressure in the second half of 2015 due to the implementation of wage increases as well as offering of paid time-off for employees at company-operated restaurants and educational assistance for all restaurant employees beginning Jul 1, 2015. Apart from minimum wage increases, additional health care costs related to 'Obamacare' are a negative for the company's margins. Further, commodity costs especially that of beef and costs associated with brand positioning in the U.S. would continue to weigh on margins.

Earnings Whispers?

Our proven model does not conclusively show that McDonald's is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP : The company's Earnings ESP stands at +1.59%. This is because the Most Accurate estimate is $1.28, while the Zacks Consensus Estimate is pegged at $1.26.

Zacks Rank #4 (Sell) : We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the restaurant industry that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Starbucks Corporation SBUX has an Earnings ESP of +2.33% and a Zacks Rank #2 (Buy).

Wingstop Inc. WING has an Earnings ESP of +11.11% and a Zacks Rank #2.

Noodles & Company NDLS has an Earnings ESP of +14.29% and a Zacks Rank #3 (Hold).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

MCDONALDS CORP (MCD): Free Stock Analysis Report

NOODLES & CO (NDLS): Free Stock Analysis Report

WINGSTOP INC (WING): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SBUXNDLSMCDWING

Other Topics

Earnings Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More