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Stock of the week: McDonald’s

12:43 20 September 2018

Summary:

  • European tax probe on McDonald’s (MCD.US) has come to an end

  • Big Mac maker pays increasing dividend regularly

  • The company manages to provide higher earnings despite slowing sales

  • McDonald’s looks more profitable in comparison with its major peers

McDonald’s (MCD.US), an American fast food restaurant chain, attracted increased attention this week as the EU tax probe on the company ended. In this analysis we will explain what the case was about as well as what the decision was. Later on, we will take a look at the latest earnings report of the company as well as compare it with its major competitors.

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McDonald’s (MCD.US) enjoys a stable rate of location number growth. In the third quarter of 2017 the American fast food chain reduced number of its company-operated restaurants by over 35%. Source: Bloomberg, XTB Research

McDonald’s, along with other big international companies, was targeted by the European authorities over entering into tax agreements with some European countries. As a result of this agreements the American company was said to benefit from unfair tax advantage over its rivals, mostly in terms of paying lower taxes. The probe started in 2015 after complaint was submitted by trade unions saying that McDonald’s dodged as much as $1.2 billion of taxes from earnings streaming from its royalties outside the United States. The investigation was launched not long after the so-called “LuxLeaks” affair was unveiled showing numerous multinational companies making secret tax agreements with Luxembourg authorities. Luxembourg was tax hub for McDonald’s operations outside the US.

The probe ended last Wednesday when the European authorities ruled that no special tax agreement between McDonald’s and the Duchy of Luxembourg was in place. The decision spared an American fast food restaurant from the fate of other companies being subject to the European investigations. For example, Amazon was fined $294 million for its tax schemes in Luxembourg while Apple was order to pay a stunning $15 billion of back taxes for similar doings in Ireland. The decision was explained by Margrethe Vestager, the European Commissioner for Competition, during a news briefing following the announcement.

McDonald’s was paying higher dividend each year throughout the past decade. Notice that the company did so even in 2016 and 2017 despite the fact that it devoted smaller share of profits to dividend payouts. Source: Bloomberg, XTB Research

Vestager said that investigators examined whether deal between McDonald’s and Luxembourg allowed the American company to pay less taxes than it owed therefore breaching EU rules. Commissioner continued saying that no breach of state aid rules was spotted and therefore there was no reason to order paying of back taxes. However, what one can find interesting is that the European Commission recognized the fact that neither Luxembourg nor the United States received any taxes from McDonald’s operations in Europe. Vestager added that it did not result from a special treatment offered to McDonald’s by Duchy but from the mismatch between the US and Luxembourg tax rules. In turn the double taxation agreement signed between two countries resulted in double no-taxation in this case. The Commissioner concluded saying that she is pleased to see Luxembourg’s authorities examining the matter and developing new rules that would avoid such situations in the future.

McDonald’s faced negative revenue growth in the past couple of years. However, this was mostly caused by altering the business model to more franchise-oriented in 2015. Such a shift allowed company to boost its margins, and in turn EPS, as decreasing number of company-owned restaurants led to lower costs. Source: Bloomberg, XTB Research

Company released its latest earnings report on July 26. McDonald’s reported revenue of 5.354 billion USD and quarterly EPS of 1.99 USD in the second quarter of 2018. Both measures came in above analysts’ estimates. However, the fast food chain missed estimates of the US same store sales. Sales in the US locations that were open for at least a year increased by 2.6% YoY while median estimate pointed for 3% increase. Additionally, company explained that an increase was driven by higher prices rather than higher volumes, what may to some extent be explained by a worldwide shift in consumers’ preferences towards healthier food. On the other hand, company said that it managed to expand its delivery offering in the United States to up to 5000 restaurants through cooperation with UberEats. Company will release its next earnings report (Q3 2018) on October 23.

Comparison of McDonald’s and its major competitors. Data as of end of June 2018. Source: Bloomberg, XTB Research

Taking a look at the table above one can see that McDonald’s is significantly bigger than its major competitors and therefore presented ratio comparison should be treated with caution. Big Mac maker seems to have the most stable net income growth as well as one of the highest net profit margins among its peers (what may partially offset negative revenue dynamics). Apart from that, McDonald’s is the second most efficient stock from the group when it comes to inventory management and also the second most profitable in terms of ROA. Taking a look at the current ratio we can say that its liquidity is average among its peers. However, along with the Yum! Brands (YUM.US) it is also one of the most indebted companies in the table. Last but not least, McDonald’s P/E ratio shows that stock market values company’s earnings the least among its peers what may suggest that investors assume its growth to be slower than its rivals in the years to come.

McDonald’s (MCD.US) still has not recovered from the January’s rout that happened just a day after the stock reached its fresh ATH. Since then the companies downward movement is continuously halted by the support zone ranging $153.85-155.75. The sole exception (marked by the orange circle on the chart above) resulted from the downbeat analyst action. However, the stock quickly climbed back above the aforementioned zone. McDonald’s trades over 7% lower YTD. Source: xStation5

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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