Dips in the Golden Arches: McDonald’s New Quarterly Report
Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The McDonald’s Corporation (NYSE: MCD) just released their earnings report for the last quarter, which indicated a lower-than-expected quarterly profit. McDonald’s has been hurt by a weakening global economy and lowered consumer confidence. The company's stock fell $2.64 on Monday, or 2.9 percent, to finish at $88.94.
Quarterly net income for McDonald’s fell 4.5 percent to $1.35 billion. A stronger United States dollar hurt the value of sales abroad, decreasing profit by 7 cents a share. Having a strong dollar is normally a good thing – except for companies with lots of international sales. When the dollar is strong, international sales translate into fewer dollars back at home. That's an issue for McDonald's, which does two-thirds of its business in foreign countries. McDonald’s is also wrangling with the same problems that many other restaurant industries are dealing with currently – higher costs for its ingredients and rising labor costs. Global sales, while they rose 3.7 percent in the quarter, were the slowest growth numbers seen since 2009.
It’s a rarity for McDonald’s to not perform well on Wall Street, as its last disappointing figures were from the fourth quarter of 2010. The world's largest hamburger chain has thrived in boom and bust times by selling cheap eats and revamping its menu regularly with popular items such as snack wraps, salads, and fruit smoothies. But even the resilient Micky D’s is starting to fold under global economic stress, intensifying competition, and frugal consumers who are eating out less often to save money.
The McDonald’s results came only days after disappointing quarterly results from Chipotle Mexican Grill (NYSE: CMG). The burrito-building enterprise surprised investors by dropping about 30% in stock value. The lackluster economic recovery has cooled sales growth, adding to worries about how much consumers are trimming back on discretionary spending. McDonald’s and Chipotle are two examples of how the economic recovery still has a long way to go.
McDonald's growth has slowed in recent times, partly because of stiffer competition from newer chains like Panera Bread Co. (NASDAQ: PNRA), which offer higher-end food in a fast yet casual eating atmosphere. Long time arch-rivals of McDonald’s in the industry, such as Wendy's Inc. (NASDAQ: WEN) and Burger King Worldwide Inc. (NYSE: BKW), are also refurbishing restaurants, adapting their menus, and launching new ad campaigns to try to gain new consumers and win back former customers.
Wendy’s is still recovering and rebuilding from some hard economic times. However, estimates project some good growth numbers for them in the second quarter, and their stock was upgraded from a “neutral” rating to an “outperform” rating by investment analysts at Wedbush Research group.
Burger King, like Wendy’s, is also seeking to grow and put behind hard times. They recently returned to the New York Stock Exchange as a public company in June. The Miami-based chain last traded as a public company between 2006 and 2010, before it was purchased and taken private by investment firm 3G Capital. Burger King didn’t hold an initial public offering, however. 3G Capital announced an unusual deal in April to sell a minority stake to a London-based entity known as Justice Holdings. 3G Capital retains a 71% stake in the company.
There seemed to be no major roadblocks in the way of the McDonald’s empire, rapidly expanding while rivals struggled to gain traction. Both Burger King and Wendy’s were left to reform their businesses, and fast-causal competitors like Chipotle and Panera Bread were thought to be left in the dust. Until recently, that was true.
The most interesting and alarming aspect of McDonald’s curtailed growth is in the markets of Africa, Asia, and the Middle East. These markets, with expanding middle classes, are viewed as a key impetus for overseas plans for many U.S. companies. Yet McDonald’s reports that demand from these emerging markets has nearly flat-lined. In the second quarter, sales there increased just 0.9%, down from 5.2% a year ago. That segment’s operating income fell 2%.
Europe, too, is experiencing decreased demand. Sales expanded by 3.8%, while 5.9% growth was achieved last year. Operating income decreased 2%.
But all is not lost for McDonald’s. The company remains a top choice for investors and is viewed as one of, if not the best-run, fast food company. Analysts’ cheery perspective on the stock remains intact, as the stock tends to richly reward shareholders over the long term and has an appealing valuation. The shares trade at 16 times expected 2012 earnings of $5.56 and 14.5 times 2013 earnings of $6.13. (That would mean earnings growth of 5.5% and 10.3%, respectively.) The United States was the lone bright spot for McDonald’s, with sales up 3.6% and operating income increasing 2%. Still, sales growth is down from 2011′s 4.5%.
So, McDonald’s has had a below par quarter. Does this mean investors should be flipping? Not yet. McDonald’s is still a fairly stable option, and this quarter could simply be one dip in the Golden Arches.
Fool blogger Evan Buck does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Motley Fool newsletter services recommend Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
