McDonald's 2nd Quarter Profit Tops View

Posted 18 July 2006 @ 12:52 am EET     Print     Reprint     E-Mail     Comments

CHICAGO (Reuters) - McDonald's Corp. on Monday posted preliminary quarterly earnings that topped analysts' expectations, pushing shares 4.1 percent higher, as U.S. consumers hit by higher gas prices chose its fare over more expensive sit-down restaurants.

Click to Enlarge The golden arches of McDonald's is seen at the restaurant in Moses Lake, ...

June sales at stores open-at least 13 months rose a better-than-expected 5.9 percent, with sales in Germany lifted as it hosted the World Cup. "With the current budgetary concerns of the average consumer, McDonald's is benefiting from a trade down from casual dining outlets," Dave Kolpak, analyst at Victory Capital Management, said. Victory owns 2.5 million McDonald's shares, and Kolpak personally owns the stock.

The company earned about 67 cents a share for the second quarter, including 10 cents a share in income from the sale of shares in Chipotle Mexican Grill Inc. (NYSE:CMG - news) and an expense of 2 cent a share from a tax law change. Excluding one-time items, earnings were 59 cents a share. Analysts, on average, looked for 56 cents a share, according to Reuters Research.

"Their U.S. sales were stronger than I expected during the month," Dan Popowics, analyst at Fifth Third Asset Management, said. "I think the 5 percent number is pretty impressive given the higher energy prices that were out there." Popowics owns McDonald's shares personally. Same-restaurant sales rose 5.2 percent in the United States in June on strong breakfast sales. U.S. same-restaurant sales were up 4.2 percent for the quarter. The company also benefit from a Happy Meal promotion tied to the animated movie "Cars," Kolpak said,

McDonald's has been taking market share in the United States from competitors, helped by a flurry of new menu items, including improved coffee and an Asian chicken salad, one analyst said. At the same time, sales at higher-priced casual dining restaurants have been pressured as consumers grapple with soaring energy prices.

In Europe, same-restaurant sales rose 4.5 percent in June and were up 6.3 percent in the quarter. Once a weak market for McDonald's, the company has used premium sandwiches and salads to help lift sales. Germany, France and the United Kingdom all boosted sales, the company said.

"In Europe, it's all about the World Cup," Kolpak said. "Germany hosted the World Cup, and apparently sales in Germany were just through the roof." Asia/Pacific, Middle East and Africa increased 8.8 percent in June, the company said.

McDonald's shares trade at a discount to fast-food competitors like Wendy's International Inc. and Yum Brands Inc. Heading into Monday, McDonald's shares traded at about 15 times 2006 estimated earnings, while Yum had a price/earnings ratio of about 17 and Wendy's multiple was about 27.