McDonald’s (MCD) investors got two pieces of news on Sunday that offered them some relief while they waited for this morning’s quarterly results:
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McDonald’s beef patties are not – I repeat NOT – the source of last week’s E. coli outbreak.
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The fast-food chain has reapproved Quarter Pounder sales in 900-plus restaurants across Colorado, Kansas, and Wyoming, as well as parts of nine other states.
If you’re itching for a Quarter Pounder, the coast appears clear.
Of course, the crisis has already done plenty of damage, first and foremost to the dozens of people who got sick – and one who actually died. Moreover, nobody seems certain what actually caused the outbreak in the first place.
Last time I looked, they were eyeing up the onions.
When they’ll sort out the details is anyone’s guess. And we won’t know for even longer how it all affected McDonald’s Q4 bottom line.
But we now do know how the company did in Q3.
It reported this morning before the bell that revenue came in at $6.87 billion, up a tick from analyst expectations of $6.82 billion. It also beat a bit on adjusted earnings per share (“EPS”) of $3.23 (compared to predictions of $3.20).
Yet its $3.30 billion in earnings before interest, taxes, depreciation, and amortization (“EBITDA”) made for a 12.3% miss. And while it saw a small uptick in U.S. same-store sales, it disappointed in the Middle East…
China…
France…
Plus Great Britain…
The result was an overall 1.5% year-over-year same-store sales drop. So I completely understand investors’ initial negative reaction.
But I don’t agree with it. Not in the short term. Not in the long term. Not when it’s one of the most savvy, successful companies the world has ever known.
Plus, it has a little-known ace up its sleeve that easily trumps even back-to-back bad quarters and E. coli outbreaks to boot.
McDonald’s Might Be Suffering This Year – but It’s Still Improving
I’ll be the first to acknowledge that MCD isn’t having the best year. In fact, thanks to the last two weeks, it’s pretty much trading where it was in January.
And that was after battling back from a prolonged and deep downturn over the spring and into the summer.
One major reason for this fall was that McDonald’s overdid it with its food menu price hikes. In its determination to pass on inflationary forces to consumers, the fast-food king overestimated how “resilient” its consumers really were.
And it found out the hard way how very non-necessity its wares were, with Q2:
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Revenue of $6.59 billion instead of the expected $6.64 billion
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Adjusted EPS of $2.97 instead of $3.07
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Same-store U.S. sales falling 0.7% instead of growing 1.04%
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Global same-store sales falling a whole 1% instead of rising 0.84%
Hey, I never said the company was perfect. Only that it’s been an ultimate success story I cannot ignore.
That’s why it immediately set to work on offering more value-oriented meal choices after that. In fact, McDonald’s had already been rolling out that program months before.
Which meant it only had to speed it up from there.
On that Q2 earnings call, CEO Christopher Kempczinski got right to the point, noting how “Beginning last year, we warned of a more discriminating consumer, particularly among lower-income households. And as this year progressed, those pressures have deepened and broadened.”
There were, he pointed out, some negatives they didn’t have the power to change. However, “there were also factors within our control that contributed to our underperformance, most notably our value execution.”
Obviously, a company that never makes mistakes in the first place is the ideal. But since that’s impossible, we want to look for those that are willing to say “mea culpa”… and then right the wrongs they made.
And for all the disappointment McDonald’s latest quarterly report has garnered, it’s still a notable turnaround over Q2 that I can’t overlook.
McDonald’s Secret Sauce Hasn’t Gone Anywhere
Publicly traded companies can easily be worth more than their short-term share prices… especially when Mr. Market is determined to go negative. And McDonald’s is a prime example of this.
As I wrote in July after its last quarterly announcement:
McDonald’s owns 41,822 restaurants across 100 countries, with around 95% of those franchised out. This means, in order to cash in on the McDonald’s name, franchisees have to pay an initial franchise fee, an ongoing royalty fee of 4% of each restaurant’s gross sales, a 4% marketing fee…
And property rental fees, which add up very nicely for corporate.
Admittedly, it doesn’t own all those properties, often renting the land under very long-term contracts. But I’ll stand by my July article in requoting John F. Love from his book, McDonald’s: Behind the Arches:
The beauty of McDonald’s taking a “sandwich” position on real estate… was that it produced predictable profits.
Maybe not perfectly predictable quarter after quarter. But definitely something worth holding onto in spite of occasional headwinds.
I also want to remind you of McDonald’s dividend situation – which is even more predictable than its income. Both short-term and long-term, I might add.
We’re talking about decades of paying its shareholders in increasing amounts. Right now, it’s a dividend aristocrat: a company that’s raised its dividend every year for at least 25 years.
But in less than two more, it will become a dividend king: a company that’s done so for at least 50 years. As I also wrote in July:
Mark my words: That’s no small feat. There are only 54 companies that can claim that kind of dividend commitment.
McDonald’s current track record of predictability takes it through repeated recessions, downturns, and market hiccups. It includes corporate flops and flat-out failures, a few really foolish examples of misreading its customers – including in this inflationary period we’re in now – some major investing mistakes, such as selling its stake in Chipotle…
And yes, even E. coli outbreaks.
Yet it not only continues to stay standing for almost 70 years – and publicly traded for almost 60 – but continues to ultimately thrive through it all.
While it’s true that anything can happen from here, it’s hard to see how it won’t be in that same powerful position for quite a while.
McDonalds landed in the news for all the wrong reasons. But make no mistake, those golden arches are still gold.
Regards,
Brad Thomas
Editor, Wide Moat Daily