McDonald's sours as the market mellows
Burger chain's results are still outstanding.
McDonald's (MCD) shares are down over 3% in early trading after the company reminded investors it was not immune to the world's economic pressures. The burger chain results were otherwise outstanding.
Comparable sales in the U.S. rose 11.1% in February, fueled by strong demand for Chicken McBites, Filet-O-Fish, coffee beverages and McDonald's breakfast line-up. Sales at stores opened for at least a year rose 4% in Europe, led by gains in the U.K. and Russia. And strength in Australia boosted sales in Asia/Pacific, Middle East and Africa by 2.4%. Systemwide sales for February jumped 9.4%, or 9.7% in constant currencies, helped by the extra day in the month because of leap year.
What's caught investors' attention, however, is the company's commentary on the economy. As you can see it's pretty vague.
"... the current operating environment includes persistent economic uncertainty, austerity measures in Europe and commodity and labor cost pressures, particularly in the U.S.," according to the fast-food chain. "These challenges are expected to impact the company's first quarter operating income growth. "
McDonald's, though, could have said the same thing for the past few months -- but didn't. This raises many questions about the timing of the announcement. Investors are mostly wondering whether the company sees troubling headwinds, and if so, why didn't it issue a formal earnings warning? Is McDonald's being overly cautious? I suspect so.
What McDonald's is doing here is expectations management. McDonald's and most smart public companies know that Wall Street rewards managements that under-promise and over-deliver. The company would lose a lot of credibility with Wall Street if it didn't warn about an earnings shortfall, especially given the tone of Thursday's announcement. I predict that investors will hear CEO Jim Skinner talking about how the company overcame "headwinds" in the quarter on the next earnings conference call.
Even if McDonald's sees trouble ahead, that might not necessarily be terrible news.
The company has strategies in place, such as the dollar menu, that help it in tough times and such as fancy coffee drinks to advantage of the good times. This is not reflected in the share price. McDonald's trades at a price-to-earnings ratio of 19.01, well under its five-year high of 30.57, indicating that the company's stock is almost as big of a bargain as its food.
Jonathan Berr is long McDonald's.
Burger chain's results are still outstandingExpectations of the market is getting to be unsustainable growth .. across the board of commodities and service industries with the junkies hooked on profit .. and forgetting the fact that the beef didn't magically appear between the buns for the cash register to ring.
just out to make money for the shareholders.
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