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The Street Investment Idea Test Post 4

Once again eyes are on McDonalds (MCD) for the most popular reason nowadays, The Olympics! McDonald’s has been a proud sponsor of the Olympic Movement for more than 35 years. More importantly, Ricky Berens and Michael Phelps gorged at McDonalds after their gold medal winning on Tues night. Two Quarter Pounders with cheese, one Big Mac, one six-piece nuggets, two medium french fries and a medium McFlurry which accounts for 3,300 calories. What better time to think of a possible investment theme around McDonalds?

For starters, lets recap recent happenings around the stock:

Recent earnings announcement: MCD reported 2Q12 EPS of $1.32 versus consensus of $1.38. For comps by region, US + 2.9% vs. consensus of +2.5%, Europe +5.1% vs. consensus of +0.4%, and APMEA came in as +3.5% vs. consensus of +2.5%. FX had a $0.07 impact on EPS vs, guidance of $0.07-0.09, and is expected to impact 3Q EPS $0.08-0.10. The company returned $1.6b to shareholders in the form of dividends and share repurchase. So in summary, the gloomy quarter was the result of austerity measures in Europe and the sovereign debt crisis that kept people cooking at home instead of dining outside, weakening same store sales and negative impact of currency and the commodity prices. All this resulting in a 3% drop in the stock post earnings.

Commodity price pressure seems to be easing:

Although MCD saw 4% commodity inflation in Europe, they brought down guidance to 2.5-3.5% for FY2012. In addition, management has now locked in the demand for commodities to hedge any risk pertaining to a spike in prices due to a recent drought in the U.S. This should ease pressure on earnings going forward.

Europe, austerity measures and competition:

Europe comps were up 3.8% in 2Q12 vs. 5.9% last year. Europe restaurant margins were 19.3%, down 30bps yr/yr due to increasing costs in labor and commodities.

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