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“We anticipate satisfactory Q4 results against a difficult comparison, and we believe stronger momentum can emerge once McDonald's Corporation (NYSE: MCD) gets past another challenging hurdle in Q1-17,” Baird’s David E. Tarantino said in a note, while maintaining an Outperform rating on the company.
Q4 Expectations
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Although the analyst does not expect the Q4:16 results, scheduled to be announced on January 23, to be a significant positive catalyst for McDonald’s, following the 11 percent rally in the stock since the Q3:16 results report.
Tarantino still views “the one-year-out risk/reward favorably given potential for investor sentiment to improve further as MCD shows additional progress on strengthening operating fundamentals and transitioning to a higher-ROIC business model.”
The analyst expects McDonald’s to report EPS of $1.38 for Q4, on global comps of +0.5 percent, with EBIT margins up 270 bps, driven by a shift to higher margin franchise revenue.
U.S. comps are expected to decline by 2 percent, against a challenging comparison, which in turn was driven primarily by favorable weather and the introduction of All Day Breakfast.
Comp Expectations
“We are optimistic that sales-driving initiatives supported comps near estimates, although signs of widespread industry softness in December suggests opportunity for upside is limited,” Tarantino stated.
However, the comps estimate for the international businesses could prove conservative, given the potential for continued momentum in the international lead markets and foundational markets, along with improvement in the high growth markets.
2017 Expectations
Although McDonald’s newer initiatives might not be sufficient to mitigate comps softness in Q1, Tarantino expects an acceleration in Q2–Q4, “with ongoing enhancements to core brand fundamentals and possibly a better industry backdrop supporting positive momentum against less daunting comparisons.”
In addition, the analyst expects positive global operating momentum and planned refranchising transactions to drive robust improvements in ROIC exiting 2017, which is expected to drive stock valuation.
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