McDonald's needs some earnings magic Monday

The fast-food giant is desperate to top analyst expectations. A strong report would be a welcome change of pace for the company.

By InvestorPlace Oct 18, 2013 1:20PM
McDonald's Happy Meal (© David Paul Morris/Getty Images)By Alyssa Oursler

iplogoMcDonald's (MCD) could use some good news, given the lackluster performance of the stock lately. And that could come in the form of third-quarter earnings, which will be reported before the bell Monday.

Shares of MCD started off the year strong, but have been in a clear downtrend since mid-April. As a result, year-to-date gains for McDonald's stock have been whittled down to an unimpressive 8%.

A strong McDonald's earnings report would be a welcome change of pace, though, and proof to investors that new initiatives have been paying off. And any sentiment shift could give the stock some upward momentum heading into the final months of the year.

As of now, the consensus estimate for McDonald's earnings is $1.51 per share -- 4 cents lower than was expected three months ago, but still good for a 6% year-over-year increase. Analysts also expect the company to report revenue of $7.34 billion, which translates to roughly 3% sales growth over the same period last year.

A falling bar, as seen with McDonald's earnings, is usually thought to be a bad sign for stocks ... but it could be a blessing in disguise for the company. A McDonald's earnings beat would be a welcome change of pace -- even if it's over a lower hurdle.

In the second quarter, earnings came to $1.38 per share -- two pennies short of expectations. That's more or less been the norm for McDonald's stock, though, with the company missing expectations in four of the past six quarters.

On the upside, that means a simple beat could be enough to please investors.

Beating expectations is far easier said than done, of course. McDonald's earnings estimates haven't been falling for nothing.

For one, the restaurant industry is struggling to find growth, while McDonald's in particular can't seem to jump-start U.S. sales.

Even better-than-expected McDonald's same-store sales in August didn't come on American strength. Instead, a surprisingly high 3.3% jump in the chain's same-store sales in Europe overshadowed a disappointing 0.2% rise in the U.S.

McDonald's has been tirelessly rolling out new initiatives to address those lagging sales, however. A few examples:

  • Executives have made several moves to make offerings more health-conscious, including offering side salads with value meals at no extra charge.
  • The company recently hired its first chief digital officer and launched an electronic loyalty program.
  • The chain has debuted new items like a pumpkin spice latte, chicken wings and more.

Still, the headwinds keep on blowing. The recent circus in D.C., for example, resulted in a whole new wave of uncertainty and a nose-dive for consumer confidence. Meanwhile, competition is coming on both the low and high ends thanks to various initiatives at Wendy's (WEN), Burger King (BKW) and Yum Brands (YUM), among others.

But the bottom line remains the same. If McDonald's can manage to top analyst expectations in the face of these well-publicized headwinds, investors might begin to believe in the golden arches once again.

As of this writing, Alyssa Oursler was long MCD.

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