Will Comps Growth Drive McDonald's (MCD) Q3 Earnings?

Burger giant, McDonald's Corp. (NYSE:MCD) , is set to report its third-quarter 2017 numbers on Oct 24, before the opening bell.

We expect the company’s solid comps growth on the back of various sales and digital initiatives to drive top- and bottom-line results in the to-be-reported quarter. Meanwhile, though increased focus on refranchising is likely to boost earnings, it may hamper the quarter’s revenue growth.

The Zacks Consensus Estimate for the quarter’s earnings is pegged at $1.74, representing a year-over-year increase of 7.6%. The same for revenues is projected to be $5.7 billion, down 11.5% from the prior-year quarter.

McDonald's Corporation Price and EPS Surprise

McDonald's Corporation Price and EPS Surprise | McDonald's Corporation Quote

Various Initiatives to Boost Comps: Key Catalyst

Global comps at McDonald’s have been positive for the last eight quarters, marking a trend that is likely to continue in the third quarter as well. This appears to be the result of the company’s strategic efforts to boost sales.

Markedly, in order to boost comps in the United States that represent about 40% of the company’s business, McDonald’s has been increasingly focusing on growing guest traffic. In this regard, the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings.

Meanwhile, efforts to enhance digital capabilities, increased focus on delivery and accelerated deployment of Experience of the Future restaurants in the United States might further propel the quarter’s results.

However, given the prevailing challenging restaurant environment in the domestic space, the Zacks Consensus Estimate for revenues in the U.S. segment is currently pegged at nearly $2 billion, reflecting a decline of nearly 3% year over year.

In International Lead Markets, McDonald’s is consistently trying to improve its performance and drive comps via introduction of value meals, reimaging of restaurants, efficient marketing and promotions, improved service and increased convenience via delivery. Coming to High-Growth Markets, comprehensive focus around new products, alongside growth across the delivery, value and breakfast platforms has started yielding results.

However, political and economic unrest in key operating regions are likely to somewhat hurt sales. The Zacks Consensus Estimate for revenues is pegged at $1.82 billion and $1.47 billion for International Lead Markets and High-Growth Markets, reflecting a year-over-year decline of 1% and 8.5%, respectively.

Also, McDonald’s is likely to witness a decline in sales by company-owned restaurants due to the impact of its strategic refranchising initiative, which, in turn, will lower the company’s revenues in the third quarter. Evidently, revenues at company-operated restaurants decreased 8.9% to $3.57 billion in the last quarter. In fact, the Zacks Consensus Estimate for the same is pegged at $3.07 billion for the quarter under review, representing a year-over-year estimated decline of nearly 21%.

Meanwhile, higher labor costs along with currency headwinds might dent the quarter’s profits.

Why a Likely Positive Surprise?

Our proven model shows that McDonald's is likely to beat earnings because it has the perfect combination of the two key ingredients.

Zacks ESP: McDonald's has an Earnings ESP of +1.23%. A favorable Earnings ESP serves as a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: McDonald's carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates.

Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of McDonald's favorable Zacks Rank and positive Earnings ESP makes us reasonably confident of an earnings beat.

Stocks to Consider

Here are a couple of stocks, which, as per our model, have the right combination of elements to post an earnings beat this quarter.

Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) has an Earnings ESP of +9.86% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) has an Earnings ESP of +6.74% and a Zacks Rank #3.

Shake Shack Inc. (NYSE:SHAK) has an Earnings ESP of +1.40% and a Zacks Rank #3.

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