McDonald's sours as the market mellows

Burger chain's results are still outstanding.

By Jonathan Berr Mar 8, 2012 11:46AM

Photodisc/SuperStockMcDonald'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.

Tags: MCD
Mar 8, 2012 1:34PM
Time to increase your holdings in McDonald's on it's way down.  Then watch the bounce back!  One doesn't need to eat a Big Mac to enjoy McDonald's.
Mar 8, 2012 4:25PM
They cannot be doing that bad they just did remodels on 3 stores in the Grand Juncton Colorado area and  it looked like it wasn't cheap
Mar 8, 2012 5:15PM
i can safley say no burger chain will get my money. not after reading about the pink shime they put in there meat. makes me sick to my stomach .just thinking that we were all eating that stuff in there burger meat. mcdonald's and burger king. if you don't no what pink slime is .look it up on line.. if not have at it..
Mar 8, 2012 5:08PM
Burger chain's results are still outstanding  
Expectations 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.
Mar 12, 2012 11:08AM
I won't eat a "burger" at mickey d's but the sausage burrito's aren't too bad for a buck. I like these when I'm on motorcycle trips. Two bucks and you get a big breakfast quick and you don't have to smell cigarette smoke.
Mar 8, 2012 10:21PM
Smile It looks like the 99% are working hard to live below their means. Not too many  1% percenter would really care to eat cheap fast foods?Nerd
Mar 9, 2012 3:12PM
I refuse to enter, let alone eat, at a McDonalds.  I hate everything about the place including the abundance of plastic in their decor, the workers who can't speak English, and the absolute horrid quality of their over-processed, sodium-laced food.  But I sure love the morons that keep eating there and the money I have made off of the stock over the past twenty years. 
Mar 8, 2012 3:06PM
Legalize drugs outlaw pieces of **** like Mcdonalds. Their lobyistsare
 just out to make money for the shareholders.
Mar 8, 2012 1:13PM
uuuuuuuduuuuuu helllloooooooooouuu?
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