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What McDonald’s Can Do to Move Stock Higher

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McDonald’s  (MCD) - Get Free Report reported a revenue beat and an earnings miss and the stock fell. Aside from giving guidance, one ingredient that could move the stock up meaningfully would be the return of superior operating leverage. 

The stock fell more than 2% to $196 a share after the earnings results came out Tuesday morning. The stock, after having been stuck in the mud for months, rose 9.5% for the month leading into earnings. McDonald’s, like many other stocks in the U.S. market, is trading at a fairly full earnings multiple on 2021 earnings expectations, a year expected to show a rebound from the lost 2020. McDonald’s often trades at roughly 25 times next year’s earnings, but was at almost 25 times 2021 earnings, so into the print, the stock had something to lose. 

Here were the second quarter results against Wall Street’s expectations: 

  • Revenue: $3.77 billion v. $3.68B (actual: -30% year-over-year)
  • Same-store-sales: -23% 
  • Operating Margin: 25% (42% last year) 
  • Adjusted Earnings Per Share: 66 cents v. 74 cents (actual: -68%)

The second quarter has been expected to be the worst of the pandemic. Management said the revenue declines lessened as the quarter progressed, as states and counties around the world reopened. Monetary and fiscal stimulus likely aided the easing of declines. The operating margin was decimated by virus-related costs, $200 million in marketing costs, hundreds of millions in selling, general and administrative costs and tens of millions in non-cash expenses and other items. 

One concerning comment from management: More than $200 million was "committed incremental franchisee support for marketing to accelerate recovery and drive growth across the U.S. and International Operated Markets.” This potentially indicates the elevated cost structure during the pandemic may not abate so soon, as sales are now somewhat dependent on that marketing spend. This is profit margin negative and earnings negative. 

McDonald’s did not give guidance. And while about 96% of stores globally are open, investors want to hear more about opening and closing plans. But most companies are shying away from guidance, as the virus situation remains highly uncertain. 

For a more solid earnings stream during the pandemic, McDonald’s may have to become highly vigilant on its cost structure. The stock is roughy 10% below its 2020 high, whereas the S&P 500 is about 4.6% below its all-time-high. 

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