McDonald's 4Q Earnings: Wall Street's Take

NEW YORK (TheStreet) -- The muted reaction on Thursday to fourth-quarter earnings from McDonald's  (MCD) seemed to indicate a non-starter. But Wall Street's analysis on Friday rings a different tone: hang in there, investor, there's still more in store for the Big M.

Before Thursday's market open, the world's largest restaurant chain reported higher fourth-quarter and full-year revenue, but falling comparable-store sales across the U.S. and in Asia/Pacific, Middle East and Africa (APMEA) threw a red flag. On its home turf, comparable-store sales dropped 1.4%, a steeper fall than the 0.2% fall anticipated by Consensus Metrix, while APMEA saw a 2.4% decrease over the quarter.

"As we begin 2014, global comparable sales for the month of January are expected to be relatively flat," warned CEO Don Thompson in a statement.

For the fourth quarter, the chain reported net income of $1.40 a share, beating the consensus estimate among analysts polled by Thomson Reuters by a penny, and coming in 1% higher than the year-earlier quarter. Fourth-quarter revenue was up2% year-over-year to $7.09 billion, but missed consensus by $22 million.

For all of 2013, the Oak Brook, Ill.-based business recorded net income of $5.55 a share, in line with expectations, and revenue of $28.11 billion, $18 million lower than the consensus estimate.

In response, shares closed 0.46% higher to $95.32 with investors neither bullish nor bearish on the company's results.

MCD Chart MCD data by YCharts

Here's what Wall Street analysts have to say on the hamburger chain's performance:

JPMorgan analyst Kenneth B. Worthington reiterated his "overweight" rating for the the stock but noted impatience over the chain's progress.

"Shares of McDonald's were down 3% over 2012/2013 on an absolute basis, and have underperformed the S&P by ~50%. This underperformance did follow a strong year of outperformance of ~30% in 2011, and a good 2010. Consecutive years of underperformance were last seen from 1999-2002, when MCD underperformed the S&P by 30%, a period marked by major fundamental underperformance and poor capital allocation but led to the major rebirth of one of the world's great brands and corporations," Worthington wrote in the research paper.

UBS reiterated McDonald's as a "buy" with a price target of $107, assuring "it would be a mistake to count MCD out."

"The conference call offered little insight into what actually drove the US Dec. slowdown and implied deterioration into Jan.; not even enough to debate. Yes, new sales layers aren't obvious and premium product innovation hasn't resonated, but we simply aren't willing to count MCD out," wrote analyst Keith Siegner.

"This is a powerful platform and creativity and boldness in product and marketing (the hiring of an external CMO is a sign that MCD is willing to truly innovate), investments in kitchen, reimaging, and peak hour throughput, and any digital effort can all increase relevance. We believe this system is not too big to change, it just needs to be willing to try. All that said, we recognize that improved sales are the necessary catalyst and that this could take time."

For 2014, UBS predicts earnings of $5.95 a share on $29.56 billion in revenue. For the following year, it forecasts earnings of $6.50 a share on $31.25 billion in revenue.

Bank of America Merrill Lynch is sticking with its "buy" rating with a price target of $110.

"We find MCD shares appealing given an attractive valuation with MCD selling at a 30% discount to quick service restaurant (QSR) comparable stocks, low investor expectations as evidenced by reaction to the quarter, and the potential for U.S. and European same store sales to improve in 2014," wrote analyst Joseph Buckley in a report.

"Potential catalysts in 2014 include the aggressive first half U.S. rollout of "high density" assembly tables that have potential to improve speed of service and to offer product news, new management in the important but soft Germany market, and a strong competitive position in Europe (38% of 2013 operating income) that positions MCD as a European stabilization/recovery play. MCD identified the U.S., Germany, Australia and Japan as its key "opportunity" markets for improvement."

Bank of America maintained its earnings estimate of $5.90 a share in 2014 and $6.50 a share in 2015.

Deutsche Bank reiterated McDonald's as a "buy" with a $105 price target, noting that while it posted a mixed result against a low bar, positive managerial improvements could spark progress.

"Management's comments from the call focused more on operations and execution than we've heard in recent quarters, which we view as a good sign," wrote analyst Jason West in a report.

"Lack of compelling new products, an "overcomplicated" menu, poor execution, and aggressive pricing seem to be factors driving the share loss. We expect all of these issues to be addressed in 2014. Importantly, we sensed that mgmt. may be more open to meaningful changes in the global SG&A cost structure and co./franchise mix than we've heard in the past. We believe a more aggressive cost realignment program and/or a more aggressive refranchising effort would be well-received by investors."

Sterne Agee kept its "buy" rating and $107 price target, given a "favorable risk/reward profile."

"While MCD's operating environment remains difficult, we believe expectations are low for upcoming quarters. In addition, the company's sales in Europe are improving, and we believe that the U.S. business can sequentially improve in 2014," wrote analyst Lynne Collier in the report.

BMO Capital Markets analyst Phillip Juhan has a "market perform" rating on the stock with a downwardly-revised price target of $103.

"The competitive set has gained ground, as McDonald's has struggled to implement compelling new product initiatives. In recent history, we think McDonald's was able to take market share by broadening its consumer appeal to a more insulated (higher-income) demographic. In contrast, we see evidence today that McDonald's is becoming more focused on the value side of its menu - perhaps an indication that it's getting tougher to broaden appeal at the high end. We see 2014 shaping up to be similar to last year - another year of undersized sales and earnings growth, which is leading to further rationalization of capex and costs," wrote Juhan in a client note.

Jefferies reiterated a "hold" rating and $91 price target, predicting "more of the same ahead."

"U.S. margins could stabilize as Dollar Menu & More gains traction & capacity/execution efforts roll out, but uncertainty/cost pressures linger across all regions," wrote analysts in a report.

"It's still early, but the Dollar Menu & More appears to be tracking in line with expectations, driving modest incremental traffic, avg. check & a slightly positive margin contribution. We think MCD is taking the right steps to improve menu innovation & marketing (new CMO, digital outreach) and will roll out the kitchen capacity initiatives through May-June to address execution challenges, but competition remains fierce."

Finally, Credit Suisse kept its "neutral" rating and $96 price target.

"Structural issues remain," wrote analysts in the report. "Low-income exposure: these consumers represent a large portion of the customer base that have yet to see a meaningful recovery. Coupled with incremental near-term risks from expiring unemployment benefits, weather-related utility bills, and weather-related days off from hourly work, over exposure will continue to challenge MCD.

"The lack of pricing power with the low-income consumer generated from years of pushing the dollar menu will only become more pronounced with decelerating grocery inflation."

TheStreet Ratings team rates MCDONALD'S CORP as a Buy with a ratings score of A. The team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

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