McDonald’s Sizzles After Q3 Beat

It’s Time To Buy More McDonald’s

McDonald’s (NYSE:MCD) has been a decent pandemic-rebound play but there is more to the story than that. The king of fast food has been working hard over the past couple of years to streamline its menu and operations and put the company back on track for growth. The pandemic was more than a little hiccup for the company but the rebound is strong, and the company’s efforts are paying off. Among the company’s many strengths are digital and drive-thru, two features that make it a leading choice for fast, easy, and cheap socially-distanced dining.

"The resilience of the McDonald's system was on display during the third quarter as the competitive strength of our business and the 3 D's – Digital, Delivery and Drive Thru – led to significant global comparable sales recovery," said McDonald's Chief Financial Officer Kevin Ozan.

McDonald’s Beats On The Top And Bottom Line

McDonald’s results are impressive but there is a mitigating factor that investors should be aware of. The bottom-line results are favorably impacted by the sale of part of its Japanese business. The sale is worth $0.13 of the GAAP earnings and 3% of the Japanese business. That said, system-wide revenue came in at $5.42 billion showing a robust 44% sequential growth across all business segments.

The revenue is down 1.5% from last year but beat consensus by a full percent. More importantly, margins expanded significantly and came in nearly 600 basis points ahead of expectations. The aforementioned sale had a positive impact on the margins but does not account for the entire gain. On a segment basis, U.S. sales were the strongest and up 4.6% versus the consensus of 4.3%. Sales in the International segment fell -4.4% but came in 560 basis points above the consensus.

Moving down to the bottom line, adjusted and GAAP eps beat the consensus by wide margins. The GAAP EPS of $2.35 are up 18% from last year and beat by $0.44 while the adjusted EPS of $2.22 are up 5.0% YOY and beat by $0.32. Looking forward, the company is expecting to see mid-single-digit revenue growth in 2021 driven by some new initiatives. The company is going to increase its partnerships with celebrities (endorsements always help), build on its chicken menu (the chicken war of last year is reason enough, I think), and launch a customer loyalty program (a program that will link in nicely with the eCommerce angle). I like it.

McDonald’s On Track For Dividend Growth

McDonald’s is a very solid dividend payer yielding about 2.4% right now. A quick look at the payout ratio and balance sheet may raise some red flags but you have to remember something. 2020 was not a great year for McDonald’s through no fault of its own, the common metrics used to gauge stock are based on this year’s estimates and/or results, and the outlook for next year is robust. In that light, this year’s 86% payout ratio may seem high but looking to next that should fall to near 60% which is much better. Add to that the company’s cash position and it looks like MCD will weather the storm and increase the payout for a 20th year next fall. PS. The company just upped the dividend with the last declaration.

The Technical Outlook: McDonald’s Is Setting Up A Buy Signal

Share’s of McDonald’s popped on the 3Q news and moved above the short-term moving average. The move looks bullish and confirms support in-line with the uptrend with one caveat. The profit-takers and weak-hands were waiting in the wings and have prices moving lower from today’s gap-up high at the open. In the near-term, look for support to continue holding along or near the $210 to $220 range. If it does a strong buy signal is likely to develop. A break to new highs would confirm my outlook and carry the stock up to the $240 to $260 region.