McDonald's reports numbers light of consensus

The one that we were most focussed on was McDonald's, which reported decent enough numbers, but missed expectations.



The full release is available via this link, and the headline pretty much sums up a tough quarter: McDonald's Second Quarter Reflects Solid Top-Line Results, Economic Headwinds And Strategic Investments. There is clearly an impact from the stronger US Dollar, sales increased five percent in constant currency but was flat in their reporting currency, Dollars of course. You could not get more American than McDonald's and Coca-Cola. Maybe, but you know what I mean. The same happened of course with earnings, up 3 percent in constant currencies, but down 2 percent in Dollars to register 1.32 per share. Europe. Yip, whilst sales in Europe are strong in local currencies, suggesting that perhaps the trade down is taking place, this does not help when you translate back to Dollars.



"For the quarter, Europe delivered comparable sales growth of 3.8% while operating income decreased 3% (increased 8% in constant currencies). Ongoing strength in the U.K. and Russia led the segment's comparable sales and constant currency operating income growth, with France and Germany also contributing. Reinvigorated everyday affordability options, ongoing premium product innovation and restaurant reimaging were key sales drivers for the quarter." See, sales are good, they are more profitable than last year, you will see this hacked graph from Yahoo! Finance that will show what the problem has been over the last year. Yahoo finance? Well, the graph came out better, you can find it here: EUR/USD (EURUSD=X).





This means that whatever McDonald's (or any American company operating there) have been selling in Europe a year ago in Euros, versus today, you are getting nearly 16 percent less in Dollar terms. Our local exporters and importers know this currency volatility all too well. Around three eights of all McDonald's profits come from Europe. So, this is even worse for every big Mac, smoothie, coffee, muffin, a Salade Chèvre Croustillant in France or a Pannkakor (Pancake) in Sweden. Whatever the menu item, tweaked for the geography, it does not help McDonald's when the Dollar strengthens too much. What normally might help them would be that the soft commodity prices might decrease, as the Dollar strengthens, but if you have been paying attention you would have seen soft commodity prices like corn and soya beans going through the roof. All as a result of a bad drought in the USA.

But these fancy menu items tell me nothing about the immediate future or the long term profitability and continued success of the brand and the company. Personally I must eat at a McDonald's three to four times a year, which is just awful! I should, in the words of Brendan Venter, try harder. The reason for having being in the stock in the past is clear, the company, although in the restaurant industry (depends who you are, restaurant might be generous) is seen to be defensive in nature. The company has managed to grow earnings by 6 to 7 percent (in same currencies) year in and year out, but for the first time is reporting sales slowing across their geographies. If our thesis is right, the "situation" could be close to bottoming. And if the Europeans come up with a central plan, well that might be good for the Dollar sales of McDonald's. But the couple of analyst notes that I have seen so far are turning neutral on the stock.



The dividend payment ratio is always around half of earnings and one of the main attractions. Expectations this year are around 2.80 USD (Q2 of 70 cents was declared the other day), whilst next year the quarterly dividend is expected to ratchet up to 77 or 78 cents a quarter. The year after the expectations are for roughly 85 cents a quarter. So, if you were to hold the stock for the next three years (and buy it today at 89 Dollars a share) you average yield would be three and a half percent. And if you needed reminding US ten year debt yields less than one and a half percent currently. I know which one I would rather be owning. Expectations are for the company to make 6 Dollars worth of earnings per share next year, so at 15 times forward earnings for a company of this size and scale, I would hardly say expensive. But, as Byron pointed out to me this morning, it is possibly the Europe "thing" that is holding the stock back, because earnings are missing what have become very lofty expectations. We continue to buy the company on weakness.



There are of course anxieties about the service offering at McDonald's. In the same way that countries are starting to lean on the tobacco and liquor companies products, taxing it more just before it lands in the end users hands, McDonald's products could face the same pressures. There is increasingly the realisation in the developed world that you can't have the same health benefits and not have a say in what people consume. Over the last decade or so, McDonald's have tweaked their menu to offer folks what they want, balancing fast, affordable with healthy, being a relative term. The first salad was only introduced in late 1987. Tweaked en masse in 2003. The menu changes for each region and if people demand a specific menu item, I have no doubt that McDonald's will get that on the list. In their slow and laboured way. Check out the menu releases: McDonald's History. Nice. Byron and I are trying to become racing snakes, so perhaps we wont be eating any of these items any time soon.