Ending a blistering month in which restaurant stocks were up an average of more than 20%, "Big Five" name McDonalds (MCD) reported fourth-quarter results before Tuesday's market open. It appeared to be a very good quarter, with the company posting earnings per share of $2.59 (13 cents above consensus estimates), and revenue of $5.93 billion ($180 million above consensus).
The market was not buying it, however.
MCD shares were down 1.3% Tuesday on day that the S&P 500 rose nearly 1.5%. On Wednesday, MCD shares continued to drop, down around 1% in morning trading.
Despite good results, it's expectations for the coming year that spoiled the party. On the earnings call, McDonald's reiterated the belief that macroeconomic headwinds will persist in 2023. Management repeated Q3 earnings call sentiment for a mild to moderate recession in the U.S., along with a longer and deeper recession in Europe.
Furthermore, the company expects continued margin pressure due to commodity, labor and utility inflation. CEO Chris Kempczinski put it this way: "We need to balance passing through our pricing on our menus while maintaining our strong position on value with our customers." That means, higher prices for the consumers, and lower margins for the company.
Forward consensus estimates for 2024 call for earnings per share of $11.65, putting the forward price-earnings ratio at 23. While not cheap, it is certainly not out of line for MCD, which typically commands a higher P/E ratio than peers, due in part to its huge net income margins, which have ranged from about 18% to 32.5% over the past seven years.
However, restaurant stocks tend to see both margin and valuation compression during recessions. If McDonald's management is correct, it could be a tough environment for the sector from here.
Keep an eye on those restaurant earnings reports. When the largest restaurant chain sees a bit of trouble on the horizon, you take notice.
The rest of the "Big Five" are expected to report earnings as follows:
Chipotle (CMG) : 2/7
Yum Brands (YUM) : 2/8
Domino's Pizza (DPA) : 2/23
Darden Restaurants (DRI) : 3/27