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McDonalds: Earnings on the Menu

“At McDonald’s, millions of investors served”…that’s according to the headline from the Wall Street Journal last week.

And investors were served a solid earnings report last week. Earnings in the second quarter rose 15%. Revenue was up 16%. Global same store sales rose 5.6%.

Those numbers mark the eighth straight quarter of profit growth…and the longest winning streak since 1998.

And following the report, shares rose nearly 3% to a 52-week high.

That’s not to say there aren’t concerns. The company doubled its commodity cost outlook in the first quarter, and estimates that commodity prices in the U.S. and Europe could rise 4.5% this year…that pinch is already being felt with margins narrowing to 19%.

But there is an upside: beverages make up 20% of sales in stores (and McCafe sales in the U.S. rose 29% in the second quarter)…and beverages are less impacted by increasing commodity costs than other items like burgers. And that means McDonalds has managed to withstand food price inflation fairly well.

The bottom line: McDonalds is up 27% over the past year. And while valuations are slightly higher than the S&P 500…the stock is in line with the industry average. The stock is in a long-term positive trend, and is a well-established long-term buy. But I have to add a note of caution: last week’s action left shares overbought, and I wouldn’t be surprised to see a bit of a correction now.


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