McDonald’s Reports Great Results

With the weakness from the Starbucks earnings report, investors were uncertain whether Starbucks did poorly because of execution issues or because of macroeconomic issues. The company blamed changes in the consumers’ tastes for the miss. The holiday drinks didn’t sell well. This led me to believe the environment is fine; it was a company specific issue. That’s why the stock has done nothing for 2.5 years.

On the other hand, McDonald’s stock has been rallying ever since its turnaround 3 years ago. The stock is up 92.18% since January 23rd, 2015. It’s not a coincidence that McDonald’s is doing well while other quick serve and fast casual restaurants are underperforming. McDonald’s has been re-taking the share it had lost. In the past year, the company has won back over 500 million customer visits that it lost since 2012. In the quarter it reported on Tuesday, the global same store sales were up 5.5% which was 0.6% faster than expected; it was the fastest growth rate in 6 years. EPS was $1.71 which beat estimates by 12 cents. U.S. same store sales growth beat expectations by 0.2% coming in at 4.5%. The company took a one time tax charge like most of the financials did. It was an 84 cent per share hit which likely won’t be included in the FactSet numbers. The stock sold off 3.24% on the heels of these spectacular results.

The sell off in McDonald’s stock occurred because the great results were already baked in the stock. It also wasn’t helped by the weakness in the overall market on Tuesday. The sell off is a microcosm for what could occur this year. With the massive 35.55% rally in the S&P 500 since November 4th, 2016, the tax cut and cyclical optimism are mostly priced in. Earnings are expected to grow 14% and GDP growth is expected to be near the fastest of this expansion. There needs to be spectacular economic momentum for expectations to be beat. Stocks could sell off 10% even if everything goes according to the forecasts.