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Why McDonald's Earnings Don't Matter That Much


Until McDonald's excites, it may not see its stock price increase beyond the steady upward slope that we've been seeing for years.


McDonald's (MCD) stock fell over 1.5% in early morning trading as investors awaited earnings results from the fast-food giant. Now that the company has released its earnings results, that momentum may begin to change thanks to growth in net income and revenue.

The company's earnings rose to $1.38 billion to give the stock an earnings per share ratio of $1.33, up 14.6% on last year's figures. Such impressive figures would cause most companies' stocks to soar, but expectations are high with McDonald's, one of the few stocks to see a drop in the crash of 2008 (the stock was up 2.62% for that otherwise tragic year). To buck all trends of that year, the company increased both the frequency of dividend payouts (from annual to quarterly) and the amount (from $0.38 to $0.50 by fourth-quarter 2008).

This isn't old or insignificant news because it points to an important fact about McDonald's: The company is both recession-proof and a reliable performer in both good times and bad, which makes it a favorite for risk-averse investors. However, it also hinders the company's potential on earnings resutls, since analysts and investors both expect strong figures. The bar is high for this fast-food chain.

At the same time, McDonald's has proven itself to be a rising stock over 2011, with its 52-week low hit nearly a year ago on a chart dominated by a steadily rising slope with few drops on bad news (the biggest drop began at the end of July, when Congress flirted with defaulting on American debt and S&P downgraded the country). It recovered within 30 days to continue its upward path.

Timing, at least for an investor in 2011, wasn't terribly important, and as long as earnings showed signs of steady growth, McDonald's remained a safe bet. So do Tuesday's earnings results maintain that same steady growth?

Analysts had expected EPS of $1.30 and revenue of $6.81 billion, which were closely matched -- and exceeded -- with figures of $1.33 per share and revenue of $6.82 billion. The numbers are so close to expectations as not to matter, which is why the stock continues to trade lower than Monday down in intraday trading.

However, the in-line earnings results may mean that other market factors are at play. With the Dow Jones down slightly in morning trading on continued European worries and sluggish trading volumes, risk-averse investors may worry that reliable stocks are becoming less reliable, causing a pullout of stalwarts like McDonald's. Similarly reliable performer Yum Brands (YUM) is also down nearly a percentage point in a graph somewhat resembling McDonald's own.

With consistently strong-performing earnings, McDonald's stock price may be a victim of its own success and a victim to market factors bigger than itself. However, a truly disastrous market would likely benefit MCD due to it being one of the few beneficiaries of the paradox of thrift in a bad economy, since McDonald's -- like Wal-Mart (WMT) -- almost never sees falling revenues in a recession. We are nowhere near a recession now, so this isn't weighing too heavily on investors' minds, so the stock may not begin to buck the market anytime soon.

While the earnings results are good news, they aren't exciting news, and until McDonald's excites, it may not see its stock price increase beyond the steady upward slope that we've been seeing for years.

Editor's Note: This content was originally published on by Samuel Richter.

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No positions in stocks mentioned.

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