McDonalds – McDonald’s, Starbucks Report Earnings This Week. The Numbers Might Not Matter.
With earnings season underway,
will lead off major restaurant results this afternoon, followed by
later this week. Yet for many investors, the numbers might not matter so much.
“It’s just a matter of getting this quarter out of the way,” says Kevin McCarthy, senior research analyst at Neuberger Berman, who notes that the market isn’t particularly focused on fundamentals right now, which he thinks “are great for McDonald’s (ticker: MCD) and Starbucks (SBUX).”
While both companies were walloped in the early days of the Covid-19 pandemic on fears about restaurant closures and disrupted routines, which especially hurt breakfast, the stocks ultimately recovered to finish 2020 in the black, helped by their improved earnings, scale, and strong cash position.
However, in 2021, both stocks are down slightly. McCarthy attributes this in part to investors eschewing 2020 winners as they look forward to a post-pandemic world, and a market that’s distracted by other factors, like the short selling frenzy hitting many consumer stocks.
“Right now these names are frankly just boring,” he says, in contrast to companies that have seen triple-digit surges. “Maybe McDonald’s and Starbucks have an opportunity to be a safe hideout, but the onus is on them,” he argues, to steer investors past what’s likely to be another pandemic-impacted quarter to brighter days ahead.
That said, he’s upbeat about both stocks heading into earnings, more so McDonalds, because of this disconnect between fundamentals and the recent stock price. For longer-term investors, the near-term noise could provide an opportunity, especially since he thinks over several years one could see a reasonable blueprint toward earnings per share of $4 for Starbucks and $10 for McDonald’s, up from 79 cents and $7.95, respectively, in their most recently completed fiscal years.
While reduced competition from permanently closed independent restaurants may not be as much of a catalyst for these stocks as other restaurants, McCarthy is enthusiastic about the progress they’ve made on the digital side, which he thinks are a key piece of “sustainable Covid takeaway” growth. “The priorities that consumers had at the beginning of Covid, convenience and value, have accelerated, and these guys did a tremendous job.”
He notes that smaller restaurants are well aware that they need a strong digital presence, but it’s a pricey endeavor, tipping the scales in favor of bigger companies that have already invested heavily. “This is an environment where you have to put a good chunk of capital to be competitive…the benefits accrue to the larger guys that were already involved in that.”
Ultimately, even if the Street looks through the quarterly figures, he believes that longer-term investors should keep their eyes on the “north star” of earnings growth, which isn’t buffeted by changing market sentiment.
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