One of the leading fast food chain operators, McDonald's Corp. ( MCD ) is set to report fourth quarter and full year 2013 results on Jan 23, 2014 before the opening bell. In the last quarter, it delivered positive earnings surprise of 1.33%. Let's see how things are shaping up for this announcement.
Factors to Consider
Comps growth moderated during the third quarter due to lower consumer spending, resulting from the prevailing macroeconomic weakness. Moreover, the company reported sluggish comps for the month of November, flat with the prior month but down 2.4% year over year. The downside reflects strike by fast food workers in the U.S., stiff competition and relatively flat industry traffic trends.
McDonald's has become extremely vulnerable to macroeconomic headwinds decelerating growth in Asia and intense competition in the U.S. Going forward, the company also expects performance to be under pressure due to a sluggish business environment. Estimates have largely been revised downwards in the last 60 days for the fourth quarter as well as full year.
Despite these concerns, we still believe that the company has strong value. In order to improve its decelerated comps, the company is focusing on menu and product innovations. Moreover, its re-franchising strategy reduces capital requirements and facilitates earnings per share growth and return on equity expansion. Since a major portion of its business is refranchised, McDonald's is less likely to be affected by inflation compared to its peers.
Our proven model does not conclusively show that McDonald's is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Positive Zacks ESP: Expected Surprise Prediction or ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.72%.
Zacks Rank #4 (Sell): McDonald's Zacks Rank #4 when combined with a positive ESP makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the broader consumer discretionary sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Jack in the Box Inc. ( JACK ), with Earnings ESP of + 1.54% and a Zacks Rank #1 (Strong Buy).
Buffalo Wild Wings Inc. ( BWLD ), with Earnings ESP of + 0.94% and a Zacks Rank #2 (Buy).
Cracker Barrel Old Country Store, Inc. ( CBRL ), with Earnings ESP of + 1.86% and a Zacks Rank #2.