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Fast Food and Steady Earnings – McDonalds (MCD) 3rd Quarter Earnings Review

October 25, 2008 – Comments (1) | RELATED TICKERS: MCD

On Wed morning, McDonald’s (MCD) reported per share earnings of $1.05, enough for something off the Dollar Menu with change back.  Analysts were expecting $0.98.  For the first nine months of 2008, MCD has earned $2.89 per share putting them on track to exceed analysts’ full year 2008 estimates.

Comparable sales and operating income were up in all global regions even after adjusting European and Asia, Pacific, Middle East and Africa sales for currency exchange rates.

In the press release, CEO Jim Skinner stated, “… October sales trends remain strong and I am optimistic about McDonald’s outlook.”

During the conference call, Mr. Skinner indicated the specialty coffee program is on track in the US, stating, “about 3,800 restaurants are serving McCafe coffees and we expect to begin introducing the rest of our combined beverage business products, smoothies, frappes, and bottled drinks in mid-2009.”  There had been some reports of franchises having difficulty obtaining financing for the modifications, but the company says financing has been available.

For the value minded, it sounded like the Dollar Menu will stay, although there may be some minor changes to keep it profitable.

In Europe, comparable sales increased 8.2% in spite of, or maybe because of, a weak economy.  McDonald’s will be adding more extended hours for their European stores.  Extended hours comparable sales are growing faster than other parts of the day.

Asia, Pacific, Middle East and Africa comparable sales were up 7.8% in the quarter.  The company is focusing on breakfast sales here.  In China, breakfast accounts for only 7% of sales compared with 20% in Hong Kong and Singapore.  The Japanese equivalent of the Dollar Menu, the 100 Yen Menu, is helping drive traffic and sales in Japan.

Despite higher commodity costs, margins expanded in Europe and Asia, Pacific, Middle East, and Africa.  US margins decreased slightly, attributed to higher commodity costs.  For the full year in the US, McDonald’s expects the ‘grocery bill’ inflation to be 7%.

Regarding credit, CFO Peter Bensen stated, “Our $1.3 billion revolving line of credit has sufficient term remaining and is unused and we secured attractive long-term financing in the first quarter to prefund debt that was retired in the third quarter and we have no additional significant maturities until late 2009.” 

Currency translation had been a net positive for MCD, but with the strengthening dollar it is expected to be negative for the 4th quarter.  However, Mr. Bensen noted that the strengthening dollar has had a partially offsetting positive impact with lower oil and commodity prices.

In summary, MCD is growing revenues and earnings in a tough economy and they’re doing it in around the world.  The company has beat analysts’ earnings estimates each of the last four quarters.  The dividend was recently raised to $0.50 per share per quarter, yielding 3.77% based on Friday’s close.  For reference, that’s a higher rate than a 10-year Treasury.

Over the past three months, the stock has traded as high as $67 per share and as low as $45.79.  Friday’s close of $53.06 is a little below the mid-point of that range. 

This is one of the stocks I’ve been nibbling at lately. It's a tough market, but for those who want to put some money to work, MCD is worth a look.

All earnings call quotes from the transcript at Seeking Alpha.