3 Things You Need to Know Before McDonald's Reports Earnings Tomorrow

Wall Street's low expectations for McDonald's could work to investors' advantage heading into the quarterly earnings.

Jan 22, 2014 at 6:39PM

The world's favorite burger joint is set to report fiscal fourth-quarter and full-year earnings results before the market opens tomorrow. However, some of the challenges McDonald's (NYSE:MCD) faced in 2013 may have carried over into the New Year. Let's take a closer look at where the fast-food chain stands today and why investors might want to temper their expectations heading into tomorrow's results.

Mcdonalds Drive Through Mcd

Softness abroad
Weak comparable-store sales and increased competition should continue to weigh on the bottom line. Sales have been especially worrisome at McDonald's stores open at least a year in the Asia-Pacific region. For the company's fiscal third quarter, for example, McDonald's cited a 1.4% decline in comps for its Asia-Pacific, Middle East, and Africa locations. Worse still, the company expects same-store sales to be flat in its fiscal fourth quarter.

Of course, McDonald's wasn't the only foodie to suffer from a challenging retail environment abroad in 2013. Yum! Brands (NYSE:YUM) is also struggling to find its footing in the Asia-Pacific market after panic over the bird flu tarnished its brand image -- a factor that also hurt McDonald's in the region. In fact, Yum! Brands' same-store sales fell 11% in China alone, during the chain's third quarter.

Yum! Brands beat out McDonald's for most popular Western-style fast-food chain in China in 2012. Moreover, if McDonald's wants to get an edge on Yum!, it needs to boost same-store sales overseas in the quarters to come. This is especially important since international sales account for as much as 70% of revenue today at McDonald's.

It's no wonder, then, why analysts remain cautious about the prospects for McDonald's.

A frothy forecast
Wall Street lowered its expectations for McDonald's for the fourth quarter, following the company's tepid growth in Q3. Analysts are now looking for quarterly earnings of $1.39 per share on revenue of $7.1 billion in the period. That's significantly below the EPS of $1.52 McDonald's earned in the prior quarter.

Investors will also want to keep an eye on the company's full year results. As it stands, analysts expect McDonald's to post year-over-year revenue growth of just 2% in fiscal 2013, with the chain's revenue clocking in at $28.1 billion for the year. While there are certainly low expectations built into this name, it's not all bad news for McDonald's.

Mcdonalds Drive Thru

The contrarian point of view
Long-term investors should remember that despite recent setbacks, McDonald's is still a blue chip stock that pays a reliable dividend. Shares of Mickey D's currently yield 3.24%, with a dividend payout ratio of 55% -- not to mention that McDonald's is a dividend aristocrat because it has increased its dividend every year since 1976. As a result, the fast-food chain should continue to reward income investors in the year ahead, even as it struggles to unlock new growth channels.

Although cost pressures will persist in 2014, McDonald's is better positioned than most to weather such headwinds. After all, McDonald's remains the industry leader when it comes to generating free cash flow.

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Fool contributor Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends and owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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