ii view: McDonald’s affected by Middle East tensions

First-quarter results to 31 March

• Revenue up 5% to $6.16 billion
• Adjusted earnings up 2% to $2.70 per share 
• Quarterly dividend of $1.67 per share, unchanged from the previous quarter

Chief executive Chris Kempczinski said:

“As consumers are more discriminating with every dollar that they spend, we will continue to earn their visits by delivering leading, reliable, everyday value and outstanding execution in our restaurants.”

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ii round-up:

Fast-food giant McDonald's Corp (NYSE:MCD) today reported quarterly earnings that missed Wall Street estimates, held back by an ongoing consumer boycott of its operations across the Middle East following Israeli military action. 

First-quarter sales at its International Developmental Markets region which includes the Middle East fell 0.2% year-over-year, leaving overall adjusted earnings up 2% from a year ago at $2.70 per share. Analysts had been looking for $2.72 per share. 

Shares in the Dow Jones company initially fell 1% in US trading having come into this latest news down around 7% year-to-date. That’s similar to the fall at Starbucks Corp (NASDAQ:SBUX) so far this year and in contrast to a near 5% gain for the Dow itself. 

McDonalds operates in more than 40,000 locations in over 100 countries with around 5% of its outlets located in the Middle East. 

Product discounts offered to Israeli military personnel by franchises located there had subsequently resulted in boycotts of its restaurants by Muslim populations. McDonald’s has since attempted to address the issue by buying the Israeli franchises for an undisclosed sum.  

Sales in the US, accounting for 42% of total sales, slowed to growth of 2.5% from 4.3% in the previous fourth quarter. 

Sales in its biggest international region which accounts almost half of overall revenue, and which includes the UK and Germany, eased to growth of 2.7% from 4.4% in the prior quarter. 

Second-quarter results are likely to announced late July or early August.    

ii view:

Started in 1955 and headquartered in Chicago, McDonald’s today sells burgers, fries, and other items globally. Competitors in its home US market include KFC owner Yum Brands Inc (NYSE:YUM) and Chipotle Mexican Grill Inc (NYSE:CMG). Under its ‘Accelerating the Arches strategy’, the company is looking to build on areas including delivery, digital related sales and Drive-Thru. Its customer loyalty programme now operates in more than 50 markets. 

For investors, geopolitical tensions cannot be ignored as evidenced by the impact on Middle East sales and withdrawal from Russia after its invasion of Ukraine in 2022. Western tensions with China also persist, while sales in its core US home market have slowed and costs for businesses generally remain elevated.

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On the upside, capital expenditure of up to $2.7 billion in 2024 is focused on opening new restaurants including around 1,000 in China. Management initiatives such as promoting its customer loyalty programme are ongoing, high geographical diversity persists, while a record of increasing the dividend annually since 1976 and a forecast yield of 2.5% (not guaranteed) should not be overlooked. 

For now, heightened global geopolitical tensions continue to offer room for caution in the short term. Nonetheless, a focus on customer convenience and product value is likely to keep the long-term investment case intact. 

Positives: 

• Defensive value product offering
• Progressive dividend policy

Negatives:

• Cost pressures
• Subject to currency fluctuations 

The average rating of stock market analysts:

Buy