(MCD) McDonald’s Beats Earnings Estimates – Shares Up

McDonald’s Corporation (MCD) posted third quarter 2010 earnings of $1.29 per share, beating the Zacks Consensus Estimate of $1.24. Third quarter earnings escalated 12% from $1.15 per share reported in the prior-year quarter. However excluding the unfavorable currency impact of 3 cents in the reported quarter, earnings soared 15.0% year over year.

The better-than-expected results were driven by value offerings and premium products, and a rise in comparable-store sales across all regions. The company also benefited from its strategy to renovate restaurants and innovating new menu offerings, which drove higher traffic in the reported quarter.

The world’s largest hamburger chain, McDonald’s said that revenues for the quarter climbed 4% from the prior-year period to $6.3 billion, outperforming the Zacks Consensus Estimate of $6.2 billion. Excluding the negative impact of foreign currency translation, revenues grew 6.0% year over year.

Revenues from company-operated restaurants rose 4% from the prior year quarter to $4.2 billion while revenues from Franchise-operated restaurants jumped 5% to $2.1 billion. Total operating income grew 8% to $2.1 billion.

McDonald’s global comparable-store sales rose 6.0% during the quarter with U.S. sales up 5.3%, Europe up 4.1% and Asia/Pacific, Middle East and Africa (APMEA) up 8.1%.

The new menu offerings Incorporatedluding value-based drinks, frappes and McCafe premium coffee line-up along with the breakfast dollar menu, have perked up U.S. comps and operating income (up 7%).

In Europe, operating income grew by 3% (12% in constant currency). The premium product innovation, signature menu at a reasonable price, longer operating hours and restaurant re-imaging program continued to drive market share gains. In APMEA, operating income jumped 22% (15% in constant currency), driven by higher consumer demand resulting from core value offering and daypart extension.

McDonald’s operated expense and franchised restaurant occupancy expenses spiked up 200 basis points year over year, and selling, general and administrative expenses inched up by 100 bps from the prior-year quarter.

Financial Position

During the quarter, MCDonald’s returned shareholders $1.4 billion through share repurchases and dividend payment.

Outlook

The company expects these positive trends to continue in the fourth quarter and thus expects October global comparable sales to increase in the range of 5% to 6%.

Our Take

McDonald’s continues to grow same-store sales while maintaining healthy margins. We believe, over the next few quarters, revenues will grow through unit expansion and strong comps momentum. Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects due to its exposure to faster-growing international markets.

Moreover, the franchising strategy that is predominant in McDonald’s business model helps drive steady cash flow streams, solid margins and returns. Recently, the company also hiked its dividend by 6 cents to 61 cents per share. However, stiff competition from other quick-service restaurant operators and macroeconomic factors influencing consumer spending patterns remain areas of concern.

Consequently, we have a Zacks #3 Rank (short-term Hold rating) on the shares. We also reiterate our long-term Neutral recommendation.

One of McDonald’s primary competitors, Yum!’s Brand Inc. (YUM) has reported adjusted earnings of 73 cents per share for its third quarter 2010, which inched past the Zacks Consensus Estimate by a penny. The earnings increased 5% year over year, mainly on the back of strong performances in its China division.

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