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Category: Stock Market and Mcdonalds
Date: 26 October 2019 Stock Price: $194.61 We take a look at the 3rd quarter earnings report of their 2019 fiscal year of Mcdonald's the world's largest burger franchise company
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About Mcdonalds
The McDonald Brothers
Dick and Mac McDonald moved to California to seek opportunities they felt unavailable in New England. Failing in the movie business, they subsequently proved successful in operating drive-in restaurants. In 1948 they took a risk by streamlining their operations and introducing their Speedee Service System featuring 15 cent hamburgers. The restaurant’s success led the brothers to begin franchising their concept—nine becoming operating restaurants.
Ray Kroc
A native Chicagoan, Ray Kroc left high school after his sophomore year to join the World War One Red Cross Ambulance Corps. The war ended before his unit was sent overseas with Ray returning home to earn a living as a musician and later selling paper cups. In 1939, he became the exclusive distributor of the Multimixer (a milkshake mixing machine). He visited the McDonald brothers in 1954 which led to him becoming their franchise agent. He opened up the first restaurant for McDonald’s System, Inc., a predecessor of McDonald’s Corp. in Des Plaines, Illinois in April, 1955. McDonald’s acquired the rights to the brother’s company in 1961 for $2.7 million.
Going Global
Ray Kroc’s vision was that there would be 1,000 McDonald’s restaurants solely in the United States. Yet, McDonald’s continued to grow and expand into international markets beginning in 1967 opening in Canada and Puerto Rico. Today, the company has over 36,000 restaurants in over 100 nations. The most recent opening in Kazakhstan in 2016.
Dick and Mac McDonald moved to California to seek opportunities they felt unavailable in New England. Failing in the movie business, they subsequently proved successful in operating drive-in restaurants. In 1948 they took a risk by streamlining their operations and introducing their Speedee Service System featuring 15 cent hamburgers. The restaurant’s success led the brothers to begin franchising their concept—nine becoming operating restaurants.
Ray Kroc
A native Chicagoan, Ray Kroc left high school after his sophomore year to join the World War One Red Cross Ambulance Corps. The war ended before his unit was sent overseas with Ray returning home to earn a living as a musician and later selling paper cups. In 1939, he became the exclusive distributor of the Multimixer (a milkshake mixing machine). He visited the McDonald brothers in 1954 which led to him becoming their franchise agent. He opened up the first restaurant for McDonald’s System, Inc., a predecessor of McDonald’s Corp. in Des Plaines, Illinois in April, 1955. McDonald’s acquired the rights to the brother’s company in 1961 for $2.7 million.
Going Global
Ray Kroc’s vision was that there would be 1,000 McDonald’s restaurants solely in the United States. Yet, McDonald’s continued to grow and expand into international markets beginning in 1967 opening in Canada and Puerto Rico. Today, the company has over 36,000 restaurants in over 100 nations. The most recent opening in Kazakhstan in 2016.
Financial overview of Mcdonalds' latest earnings report
The data the below refers to the latest quarter's data unless specified otherwise
- Revenue: $5.430 billion (up from$5.369 billion for the same quarter of the previous year)
- Revenue increased by 1% over the last 12 months
- Total operating expenses: $3.021 billion (up from $2.951 billion for the same quarter of the previous year)
- Total operating expenses increased by 2% over the last 12 months
- Total operating expenses increased by 2% over the last 12 months
- Net income: $1.607 billion (up from $1.637 billion for the same quarter of the previous year)
- Diluted earnings per share: $2.11 (up from $2.10 for the same quarter of the previous year)
- Weighted average shares outstanding-diluted: 763.90 million (down from 779.60 million for the same quarter of the previous year)
- Cash and equivalents: $1.1345 billion
- Cash and cash equivalents per share: $1.48
- Cash and cash equivalents makes up 2.45% of the group's total assets
- Cash and cash equivalents makes up 0.67% of the group's current market capital
- Accounts and notes receivable: $2.055 billion
- Accounts and notes receivable makes up 4.45% of the group's total assets
- Cash generated from operations: $1.5169 billion (up from $1.4963 billion for the same quarter of the previous year)
- Cash generated from operations per share: $1.97
- Dividend declared for payment in September: $1.16
- Dividend yield: 2.13% (assuming the same dividend paid this quarter is paid every quarter of the fiscal year)
Mcdonalds' management commentary on the results and earnings guidance
CHICAGO, IL - McDonald's Corporation today announced results for the third quarter ended September 30, 2019.
“Our third quarter performance was strong, and broad-based momentum continued with our 17th consecutive quarter of global comparable sales growth," said McDonald's President and Chief Executive Officer Steve Easterbrook. "Globally, our customers are rewarding our commitment of running better restaurants and executing our Velocity Growth Plan by visiting more often."
Third quarter highlights:
In addition, the Company announced an 8% increase in its quarterly dividend to $1.25 per share beginning in the third quarter 2019. Steve Easterbrook concluded, "As we work to build an even better McDonald’s experience for customers by providing convenience on their terms, we continue to embrace the culture of innovation that helped launch our company over 60 years ago. That culture is rooted in a mission to provide delicious food, served with hospitality, to over 65 million customers who honour us with their business every day.”
“Our third quarter performance was strong, and broad-based momentum continued with our 17th consecutive quarter of global comparable sales growth," said McDonald's President and Chief Executive Officer Steve Easterbrook. "Globally, our customers are rewarding our commitment of running better restaurants and executing our Velocity Growth Plan by visiting more often."
Third quarter highlights:
- Strong, global comparable sales of 5.9% demonstrated broad-based strength with the International Operated segment increase of 5.6%, the U.S. increase of 4.8%, and the International Developmental Licensed segment increase of 8.1%.
- Consolidated revenues increased $61.2 million or 1% (3% in constant currencies) to $5.4 billion.
- Systemwide sales increased $1.3 billion or 5% (7% in constant currencies) to $26.0 billion.*
- GAAP diluted earnings per share of $2.11 was relatively flat with the prior year (increased 2% in constant currencies).**
- The Company returned $2.4 billion to shareholders through share repurchases and dividends. This brings the cumulative return to shareholders to $22.5 billion against our targeted return of about $25 billion for the three-year period ending 2019.
In addition, the Company announced an 8% increase in its quarterly dividend to $1.25 per share beginning in the third quarter 2019. Steve Easterbrook concluded, "As we work to build an even better McDonald’s experience for customers by providing convenience on their terms, we continue to embrace the culture of innovation that helped launch our company over 60 years ago. That culture is rooted in a mission to provide delicious food, served with hospitality, to over 65 million customers who honour us with their business every day.”
- Changes in Systemwide sales are driven by comparable sales, net restaurant unit expansion, and the potential impacts of hyper-inflation. The Company expects net restaurant additions to add approximately 1 percentage point to 2019 Systemwide sales growth (in constant currencies).
- The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point change in comparable sales for either the U.S. or the International Operated segment would change annual diluted earnings per share by about 6 to 7 cents.
- With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2019, costs for the total basket of goods are expected to increase about 2% to 3% in the U.S. and about 2.5% in the Big Five international markets.
- The Company expects full year 2019 selling, general and administrative expenses to increase about 1% to 2% in constant currencies as the Company invests in technology and research & development, including operating costs associated with newly acquired Dynamic Yield and Apprente.
- Based on current interest and foreign currency exchange rates, the Company expects interest expense for the full year 2019 to increase about 13% to 15% reflecting the impact of higher average debt balances and interest incurred on certain Euro denominated deposits due to the current interest rate environment.
- A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 80% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction, the Company's annual diluted earnings per share would change by about 35 cents.
- The Company expects the effective income tax rate for the full year 2019 to be in the 25% to 26% range.
- The Company expects capital expenditures for 2019 to be approximately $2.3 billion. About $1.5 billion will be dedicated to our U.S. business, nearly two-thirds of which is allocated to approximately 2,000 EOTF projects. Globally, we expect to open roughly 1,200 restaurants. We will spend approximately $600 million in our wholly owned markets to open 300 restaurants and our developmental licensee and affiliated markets will contribute capital towards the remaining 900 restaurant openings in their respective markets. The Company expects about 800 net restaurant additions in 2019.
Mcdonalds (NYSE: MCD) stock price history
The image below, obtained from Google shows the stock price history of Mcdonalds over the last 5 years. And the stock has provided excellent returns for the group's stockholders over the last 5 years. With the stock trading at around $93 a share 5 years ago to the current $217.97 it is trading at right now. That's a 134% return for Mcdonalds stockholders over the last 5 years. And the stock is trading at very close to its 52 week high and is far away from the 52 week low, which is another indicator of the positive momentum in Mcdonalds stock price.
Recent coverage of Mcdonalds
The extract below discusses the latest earnings report of Mcdonalds as obtained from TheStreet.com
McDonald's (MCD - Get Report) was lower Tuesday, falling 3.1% to $203.43 after a disappointing earnings report. The stock has been under pressure since hitting its 52-week high in early August. Valuation concerns continue to weigh on investors as McDonald's searches for growth. Earnings of $2.11 a share missed analysts' expectations by 10 cents, while revenue of $5.43 billion grew 1.1% year over year but missed estimates by $40 million. That said, global comp-store sales were up 5.9%, beating estimates of 5.5% growth. Business is going well for McDonald's but investors were looking for a catalyst to bid the stock higher. Even though global comps came in strong, a top- and bottom-line miss isn't the momentum booster that bulls needed.
Read the full article here
McDonald's (MCD - Get Report) was lower Tuesday, falling 3.1% to $203.43 after a disappointing earnings report. The stock has been under pressure since hitting its 52-week high in early August. Valuation concerns continue to weigh on investors as McDonald's searches for growth. Earnings of $2.11 a share missed analysts' expectations by 10 cents, while revenue of $5.43 billion grew 1.1% year over year but missed estimates by $40 million. That said, global comp-store sales were up 5.9%, beating estimates of 5.5% growth. Business is going well for McDonald's but investors were looking for a catalyst to bid the stock higher. Even though global comps came in strong, a top- and bottom-line miss isn't the momentum booster that bulls needed.
Read the full article here
Mcdonalds (NYSE: MCD) latest stock valuation
So based on Mcdonald's latest earnings report, what is our target price for Mcdonalds? Based on Mcdonalds latest earnings release our valuation model provides a target (full value) price at $198 a share (the same target price we had for Mcdonalds based on their 2nd quarter 2019 earnings report). We therefore believe the stock of Mcdonalds is close to being fully valued
We therefore believe from a fundamental investing and value perspective the stock price of Mcdonald's is overvalued and we would not recommend buying into the stock at its current price, but rather at levels about 10% below our target price which is at $198 a stock. So we would suggest looking to buy Mcdonalds at close to $174.60 or below. Since it is close to our target (full value) price we expect the stock of Mcdonalds to trade sidways in coming weeks and months until there is is a catalyst to move the stock of Mcdonalds higher or lower.
We therefore believe from a fundamental investing and value perspective the stock price of Mcdonald's is overvalued and we would not recommend buying into the stock at its current price, but rather at levels about 10% below our target price which is at $198 a stock. So we would suggest looking to buy Mcdonalds at close to $174.60 or below. Since it is close to our target (full value) price we expect the stock of Mcdonalds to trade sidways in coming weeks and months until there is is a catalyst to move the stock of Mcdonalds higher or lower.
Next earnings release of Mcdonalds
It is expected that Mcdonalds 4th quarter 2019 earnings release will be released in late January 2020