MCD Preview: Comps Could Be Key

McDonald's (MCD - commentary - Cramer's Take) is expected to report EPS of 97 cents, up 17% from 83 cents last year, on sales growth of 4.8%, to $6.18 billion. Outstanding shares are expected to decline 6%.

While the comps are likely to be about 7% for the quarter (5% for the U.S., 8% for Europe and 6% for the rest of world), which overcomes cost pressures, investors are looking down the road to an economic slowdown in the U.S., Europe and possibly in the developing world as well.

Using the 5% risk premium for a strong consumer cyclical (well under the rest for the restaurant chains), at $57, the stock discounts a 3% five-year EPS growth rate. For comparison, a sort of Street consensus growth algorithm for McDonald's, which I would agree with for normal times, is 2% unit growth, 1 to 3% comps for 3 to 5% sales and revenue growth, a bit of margin expansion on company-operated revenue and a tad of SG&A leverage to a 6% to 7% operating income growth. Buying back shares gets us to maybe 9% EPS growth, implying a $74 stock, for 31% appreciation.

Even with the present tailwind of the high-margined beverage sales in the U.S., I would rather look at internationally oriented consumer staples stocks that are cheaper and have less risk. Stated simply, the U.S. consumer has to get back to a prior trendline 7% savings rate from 0. Cutbacks in consumer discretionary spending are going to be the prime changes the consumer will have to make. While there still be a trade-down effect favoring restaurant meals at McDonald's, the cutback in normalized revenue to a quick-service restaurant has to be greater than 7%. So, maybe there is a 10% normalized decline in McDonald's U.S. restaurant sales in the U.S. That may be only 5 or 6 cents per share for co-op units, but the effect on the franchisee system will be substantial over the next two to three years.

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At the time of publication, Thomas had no positions in the stocks mentioned.