- The US market is improving even though same store sales are down for 7 quarters+. This market is being offset by international markets but is expected to return to growth in 2016,
- The company is pushing ahead with its capex plans in strong markets such as Australia, the UK and Germany. Expect even more growth out of these markets, going forward, due to dollar weakening.
- Option premium will get inflated coming into McDonald's earnings Q3 2015. Use the inflated premium to start scaling into McDonald's stock.
McDonald's (NYSE:MCD) share price has rallied hard (up almost 12%) since the S&P 500 (INDEX:SPAL) lost over 100 points at the back end of August and many investors believe we could be near an inflection point for the stock. McDonald's earnings Q3 2015 are scheduled to be reported on the 22nd of October and I'm very optimistic that the company can report strong results which would be strange in itself. Mcdonald's bears always point to the poor numbers the restaurant giant has been producing in the US over the last 2 years (same store sales are down in the US over the last 7 quarters) but as the chart shows below, this stock has traded flat since 2013 plus the dividend pay-out has gone from $0.77 cents a share to $0.85 cents a share.
Over the last 2 years, I have been advising my readers to long this stock because I saw it as a bargain. My reasoning was simple. The company's strong balance sheet with huge free cash flows every year enable the company to increase its dividend whilst also increasing the amount of shares it repurchases (buybacks). This keeps investors interested especially when you see the stock trading flat over the last 2 years in an environment of declining earnings and revenues. If the company can only return to 50% of the growth rates of yesteryear, I see the share price rallying from here. Let's explain why and also an earning strategy underlying this.
Will McDonald's earnings beat analyst consensus again?
First of all, the US market (which is crucial) has been declining in revenues but the rate of decline has definitely been slowing which is encouraging. Analysts consensus EPS stands at $1.27 which implies an increase of $0.03 from Q2 of this year. Can the company beat analysts expectations as it did both on revenue and EPS in Q2? I think it can, especially when you see the CEO coming out recently and stating that he expects positive global comp growth in Q3 of this year. I think that the turnaround in the US is slowly happening under the radar of analysts and I expect this market to return to growth probably around the second quarter of 2016. Why? Well, its new localised menus, marketing initiatives and all day breakfast campaign (which really should bring in more value seeking customers) should definitely increase sales and profits before long. I expect sales to be down again in Q3 in the US but not as much as analysts expect. As long as the company's revenue is declining at a slower rate than in previous quarters, this will definitely be taken as a positive by investors.
UK, German and Australian markets could drive growth
Its all about momentum and the company definitely has things on the up in markets such as the UK, Germany and Australia. In the UK ( where Steve Easterbrook, the new CEO, basically built the company brand), the company is investing heavily into advertising in an attempt to dispel myths about the quality of its food. Most companies invest more when a market is struggling but McDonald's goal here is to not only sustain its present market share but also grow it. Its the same in Germany where the company reported increasing same store sales last quarter, for the first time since 2012. What is the company doing? Doubling down on its success by lining the autobahn with 100 new restaurants. The takeaway from Germany is that there is no advertising required which again illustrates the pulling power this multi-national has. Australia has been one of the few shining lights for the company with increasing sales since mid 2014. In earnest, this market has become a testing ground for the US market and the success of the "create your taste" campaign there was definitely the catalyst for expanding it in the US. Bears point to the fact that custom made meals are not available through the company's drive thru's, but a positive has to be the higher margins on these product items. The US may not mirror Australia's growth but if an initiative is working well there, I see no reason for it not to gain traction here in the US also.
Furthermore, 57% of total operating profits come from APMEA (Asia Pacific Middle East and Africa) & European markets, which means that the recent strength of the dollar against almost all currencies had negatively impacted the company's recent earnings. Well, the US dollar index is now at 94.58 (at time of publishing), which is a far cry from the 100+ levels it traded at the start of Q2 2015. I believe the dollar is in a bear market which will definitely help McDonald's earnings in international markets.
How to play McDonald's Earnings Q3 2015 announcement?
So, how can we use the upcoming earnings to invest into this stock? Well, if you want to tie up the capital (100 shares presently is approximately a $10,483 investment at Friday closing price), you could buy the stock and sell an out of the money covered call to bring in some extra premium. The advantage that earnings give investors is that option premiums get inflated, so one can sell options for a higher premium. Investors usually sell the option the day before earnings as options will increase in prices up to earnings. There are a number of results that can happen after the earnings announcement.
Firstly, if the stock rallies hard and the call is only a week or two from expiration, in all likelihood the stock will be called away from you at expiration. However, you will make money on the premium collected and the capital gain appreciation of the stock. Secondly if the stock disappoints on earnings and doesn't rally past your strike price by expiration, you will still be holding the stock but again will have pocketed the premium. This will enable you collect the company's next dividend pay-out which will probably go ex dividend at the end of November.
Stocks like McDonald's are proven long term holds and earnings announcements can provide investors profitable opportunities to start scaling into the stock. I expect the company to beat analysts expectations but if it doesn't, this company has proven itself to be a strong long term hold.