Financial settlement season is here. In this article, we use the TipRanks stock comparison tool to analyze McDonald’s (MCD) and Starbucks (SBUX) ahead of their scheduled earnings reports on October 29th and 30th, respectively. While both chains have underperformed this time around, a closer look reveals a bullish outlook for McDonald’s, supported by value-oriented initiatives and a clear strategy to grow sales. In contrast, I remain neutral on Starbucks, which is undergoing a leadership transition with uncertain long-term guidance.
I remain bullish on McDonald’s, even though the company had a weak June quarter for the second year in a row, missing both top and bottom line estimates. Earlier this year, McDonald’s noted that consumers, especially low-income groups, are becoming more selective.
During the second quarter, management indicated that these pressures were deepening and widening, impacting a broader range of consumers. McDonald’s reported second-quarter adjusted EPS of $2.97, below expectations of $3.07. This was the biggest surprise since January 2022. Sales were $6.49 billion, lower than expectations of $6.6 billion. Same-store sales decreased in all divisions, with an overall decline of 1%, contrary to expectations for a 0.4% increase. This marks the first decline in company-wide same-store sales since the fourth quarter of 2020.
Despite negative second-quarter results, McDonald’s stock has risen more than 20% in the past three months, outperforming the S&P 500 (SPX). This market response is due to efforts aimed at increasing the perception of “value” through $5 meal deals specifically targeted at low-income households. Additionally, the company is innovating its core menu to capture market share in chicken and beef while expanding its loyalty membership.
I remain bullish on McDonald’s ahead of its third quarter report. The company will benefit from easier comparability this quarter, as many Wall Street analysts lowered their revenue and EPS estimates. To beat Q3, McDonald’s would need to report EPS of $3.19 (up 0.1% year-over-year) and revenue of $6.8 billion (up 1.7% year-over-year).
As we saw in the second quarter, beating or under-expectations do not always drive stock price movements, but the positive response from the quarter onwards was largely due to management’s plans to re-establish value leadership. It was because of his confident tone. As a result, progress towards these expectations should be the main factor influencing the stock price.
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Additionally, improving trade and same-store sales both in the U.S. and globally is essential. U.S. same-store sales fell 0.7% in the second quarter despite expected growth, and international same-store sales fell 1.1%. In my view, improved performance in these areas could help maintain the stock’s bullish momentum.
Looking to Wall Street, the consensus rating for MCD stock is a “moderate buy.” Out of 25 analysts, 18 recommend Buy and 7 recommend Hold, resulting in a Moderate Buy consensus. However, the average price target of $313.52 suggests there is little upside.
See more MCD analyst reviews
We shift our focus to Starbucks and maintain a neutral outlook on the company, which faces significant challenges in 2024, as reflected in its recent results. In its fiscal third quarter, Starbucks missed EPS estimates for the third consecutive quarter, reporting $0.93 versus the expected $0.94, a 7% year-over-year decline. Sales were also lower than expected, dropping 1.1% from the previous year to $9.1 billion.
Additionally, Starbucks’ same-store sales in North America declined 2%, and the number of transactions, after adjusting for price increases and sales mix, decreased 6% year over year. The company also reported a 4.2% decline in operating income to $1.52 billion. Given these challenges, Starbucks provided an update to investors, predicting global comparable sales to decline by low single digits, with weaker performance particularly in China. To address these challenges, the company plans to expand store openings and aim to increase the number of stores in China by 12% by the end of 2024.
However, weak quarterly results have taken a backseat in recent months as the company recognized the need to jump-start growth by hiring former Chipotle (CMG) CEO Brian Nicol as Starbucks’ new CEO. It has become. The company’s stock price has increased more than 27% since its earnings date, but this is mainly due to the change in management rather than the latest financial results.
Setting aside Brian Nicol’s leadership and focusing on Starbucks’ upcoming fourth quarter results, I’m taking a cautious view, even though the company would benefit from better comparability this quarter. . Over the past three months, several analysts have lowered their EPS estimates, with the consensus coming to $1.03, reflecting a year-over-year decline of 2.6%. Similarly, the revenue forecast was revised down to $9.37 billion, flat year over year.
Like McDonald’s, Starbucks looks set to beat expectations across the board this earnings season. However, we expect long-term challenges in the fourth quarter, including weak same-store sales in the United States and further declines in same-store sales in China.
The main driver for the stock price may be new CEO Brian Nicol’s first actions and the company’s outlook on the earnings call. Citigroup (C) analyst John Tower said Nicoll may hold off on final guidance until he understands the business more deeply, perhaps by the first-quarter earnings report, and the long-term outlook remains uncertain. He noted that uncertainty may remain. Tower believes, and I agree, that the lack of a clear EPS base and recent share price gains create an unfavorable short-term risk-reward scenario for investors.
On Wall Street, the consensus rating for SBUX stock is a Moderate Buy, with 15 out of 24 analysts recommending a buy, 7 recommending a hold, and 2 recommending a sell. The average price target is $100.75, implying an upside potential of 4.46%.
See more SBUX analyst reviews
I view McDonald’s as a better buy heading into its earnings report, which is likely to beat expectations due to lower earnings and effective value initiatives. Meanwhile, Starbucks will also face a decline in operating results in the fourth quarter, but expected lower same-store sales and leadership changes could impact the company’s long-term outlook, resulting in lower earnings. The outlook may become more cautious ahead of the
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