I'll Be Selling McDonald's Once This Happens
After releasing its latest results, I'm watching for McDonald's stock chart to hit this threshold before exiting my position.
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On Tuesday morning, fast-food giant McDonald's MCD released the firm's third quarter financial results on the heels of last week's fresh-onion related E. coli outbreak that sickened dozens of people after they dined on the firm's Quarter Pounder sandwiches.
Estimates are that foot traffic was down about 10% at domestic McDonald's locations for the days following the Centers of Disease Control and Prevention's announcement about the outbreak. That, however, will be a fourth quarter story. This was a third quarter release.
For the three-month period ended September 30, McDonald's posted an adjusted EPS of $3.23 (GAAP EPS: $3.13) on revenue of $6.873 billion. Both of those numbers exceeded analysts' estimates, while the revenue print was good enough for year-over-year growth of 2.7%. The ten cents per share adjustment was made for pre-tax transaction costs, non-cash impairment charges and pre-tax restructuring charges.
Global comp. sales decreased by 1.5%. U.S. sales increased 0.3%, International Operated Markets segment decreased 2.1%, and International Developmental Licensed Markets segment decreased 3.5%. This reflects a significant slowdown in sales growth as for Q3 2023, comp sales were up 8.8% from the year prior, supported by impressive growth across all segments.
Operations
As revenue grew 2.7% to $6.873 billion, sales by company-owned and -operated restaurants grew 4%, and revenue driven by franchised restaurants increased 1%. Cost of sales and operating expenses increased 6% to $3.685 billion. That left an operating income of $3.188 billion, which was down 1%. That put the firm's operating margin at 46.4%, down from 52.1%. After accounting for interest, taxes and other (non-operating) income/losses, GAAP net income printed at $2.255 billion (-3%), which works out to a GAAP EPS of $3.13, down from the year-ago comp of $3.17.
Fundamental Note
McDonald's did not release the firm's statement of cash flows nor the current state of their balance sheet with the statement of income and the earnings press release. That is not that unusual for McDonald's, so we do not need to read too much into that. While, as someone who likes to do as much fundamental analysis on my stocks as much as technical analysis if not more, I find this inconvenient, there is nothing being intentionally hidden. For the second quarter, McDonald's released their Form 8-K (as they did this morning) on July 29, but then released a Form 10-Q on August 8 with all of the financial tables included.
Guidance
The firm did not get very granular in what guidance was provided. For the full year, McDonald's expects capex spending to reach $2.5 billion to $2.7 billion and expects operating margin to land in the mid to high 40% range, which is where it was during the third quarter.
My Thoughts
Obviously, it is tough for me to truly analyze a company with incomplete information. The international business is struggling, while the U.S. business is holding its own. The firm has made strides towards re-engaging with the lower- and middle-income consumers that had been priced out at the heights of U.S. inflation during the post-pandemic era.
Discounting the firm's offerings could hurt in the short-to-medium term, but this firm needs to keep its core clientele involved and those customers happen to be budget-conscious consumers. I did get long a smallish position amid the news last week, trying to catch a few shares on the dip that might rebound for a trade. That has not really happened. With this morning's 0.34% rally, I am up 0.59% on the trade. Woo hoo.
Readers will see that MCD, since early July, had gained significant ground, while trading within a regression-trend model. Then, the shares gapped lower on the E. coli news. Relative strength has come back to neutral territory, while the daily MACD is now postured quite bearishly. Readers will also see that for four consecutive days, the stock has battled around its 50-day SMA.
What will I do with my position? Well, there was no snapback, like I had hoped for. That said, I have not yet lost any principle. What I am telling you is that once MCD loses the 50-day SMA, I am outta here. Until then, I'll give it a chance to fill the gap it just created.
At the time of publication, Guilfoyle was long MCD equity.
