A stronger dollar may be better for the long-term health of the US economy but the immediate impact of dollar strength on McDonald’s, a multinational corporation with significant exposure to FX, has historically been negative from an earnings perspective.
We turned cautious on McDonald’s in May as the extent of the impact of macroeconomic trends and difficult summer months’ compares became clearer. We believe that MCD is now closer to bottoming but will have a firmer view following October sales being released on November 8th. We’d still avoid the stock on the long side, for now, but the company’s cash flow strength and the stock’s dividend yield provide support. We see 2013 bringing more issues for MCD; consensus is expecting a snap back to +10% and +11% EPS growth in 2013 and 2014, respectively. As yet, we see no evidence that MCD has taken the right steps to correct issues within its control. Macro headwinds are persisting, for now, and amplifying the impact of self-inflicted wounds. Foreign exchange is one such factor that can impact MCD’s earnings growth.
There are plenty of opinions available today, as there have been for months now, regarding the myriad consequences of tomorrow’s election for markets and the economy more broadly. Judging by the rhetoric, for what it’s worth, of each candidate, it seems that one asset that could be greatly impacted by the outcome of the election, over time, is the U.S. Dollar. Any catalyst such as tomorrow’s election, that leads the United States to economic policies supportive of the value of its currency, could meaningfully impact McDonald’s earnings power.
The chart below shows, on a trailing-twelve-month basis, the impact of foreign currency translation on EPS versus the year-over-year change in the US Dollar Index, also on a trailing-twelve-month basis.
Howard Penney
Managing Director
Rory Green
Analyst
