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Takeaway: The Street is not bearish enough on MCD.

We believe that the bulls on McDonald’s are basing their stance on some dangerous assumptions in FY13.  We have been looking for a reason to get long McDonald’s but believe, at this point, that 9% earnings growth in 2013 is unlikely to materialize. 

If history is any guide, the aggressive move to value will not be effective in over-riding investor concerns next year.  Back in October 2002, Jack Greenberg, then-CEO of McDonald’s, embarked on a “price war” after seeing his company report 10 months of declining same-restaurant sales, bringing back the Dollar Menu from a five-year hiatus.  At the time, as today, it was hoped that the Dollar Menu would help reverse a negative trend and lead to positive same-restaurant sales, but that did not materialize at the time and has failed to materialize so far in 4Q12.  Consumer perceptions of value are constantly changing; we don’t expect McDonald’s current strategy to achieve its objectives.

Management has been unwilling to concede that any factors, other than the macro environment, are weighing down earnings growth.  We are working on a more detailed analysis of the company’s outlook and will be publishing on that in mid-December. 

While McDonald’s is not reporting 4Q12 results for another two months, we are expecting one of the worst earnings reports from the company since the turnaround began in 2004.  We have come to the conclusion that the street is too optimistic on what MCD can earn in 4Q12 and in 2013.  In 4Q12, food, labor and other expenses are all working against company in what could be one of the worst quarters in the company’s recent history.

  1. We have MCD 4Q12 revenues of $6,754 million vs. consensus of $6,874
  2. Restaurant level margins of 17.1% vs consensus of 17.8%
  3. Operating margins of 29% vs consensus of 30.4%
  4. EPS of $1.29 vs consensus of $1.33

We are currently expecting 2013 to be another no-growth year for MCD EPS.  The Street is expecting a snap-back in EPS to $5.81, or 9% higher than 2012, versus our estimate of $5.27-5.30.

Howard Penney

Managing Director

Rory Green

Analyst