Why McDonald's Will Move the Dow Tomorrow

McDonald's reports tomorrow morning. Given the impact that other Dow stocks have had after releasing their earnings, investors should look out for surprises from the fast-food giant.

Jan 22, 2014 at 4:30PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Earnings reports have moved the Dow Jones Industrials (DJINDICES:^DJI) sharply in both directions over the past week, with concerns about falling revenue becoming just as important as giving solid results on the bottom line. Tomorrow, McDonald's (NYSE:MCD) joins the list of Dow components reporting quarterly earnings, and given the struggles that the fast-food giant has gone through recently, the index could react strongly in either direction depending on what the company says.

McDonald's typically releases its earnings at about 8 a.m. EST. A conference call will follow at 11 a.m. EST after the market opens.

Mcd

In preparing for McDonald's earnings, investors should keep several things in mind. Already, investors have readings on a good part of the past quarter, with global same-store sales rising 0.5% in both October and November. Yet the mix of comps was different in both months, with domestic sales rising in October but falling in November. The Asia/Pacific region has been consistently weak, while Europe has done a lot to hold up the company's sales.

Yet McDonald's struggles go well beyond simple same-store sales comparisons. Competition has appeared from numerous areas, with Yum! Brands (NYSE:YUM) making progress in restoring growth to its key Chinese operations after suffering huge sales declines in the wake of avian-flu scares in the emerging-market nation. Elsewhere, rivals like Wendy's (NASDAQ:WEN) and Burger King have come up with menu innovations that have forced McDonald's into a defensive position, and the Golden Arches' efforts to answer with an expanded value menu and other initiatives have resulted in setbacks like its slow-selling Mighty Wings offering.

At the same time, McDonald's has opened a can of worms in seeking growth opportunities. Going after Starbucks (NASDAQ:SBUX) and its coffee empire by offering premium beverages was a brilliant move for McDonald's, but it has also led to operational difficulties, with increases in customer complaints coming as employees are forced to spend extra time preparing those beverages. Similarly, efforts to find higher-price-point items has put McDonald's up against fast-casual companies such as Panera Bread, and those comparisons could prove even more difficult given the different perception that customers have of both companies.

The key to the Dow's response to McDonald's earnings lies in both comps and earnings growth. A sharp rebound in same-store sales could finally support the company's stock after a long period of underperformance. But if McDonald's can't find a way out of its recent pattern, the stock could remain in the doldrums in 2014.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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