Tuesday, July 28, 2020

Will Investors be “Lovin’ it” After McDonald's Q2?

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News shaping
the markets today

     

What’s happening: McDonald's Corp is all set to report its second-quarter results before the opening bell on Tuesday.

What happened: The fast-food titan’s second quarter, which runs from April through June, is likely to be the worst hit by the pandemic.

Despite a significant decline in customer traffic and most outlets being closed globally during the quarter, McDonald's is expected to announce a terrific improvement in trends over the past few weeks.

What are the estimates: The fast-food chain is expected to report a massive decline in sales and earnings for the second quarter.

  • McDonald's is expected to report a 30.1% year-over-year decline in revenue to $3.73 billion.
  • The consensus estimate calls for a 22.8% decline in comparable sales.
  • Earnings are projected at 76 cents per share, representing a 62.9% year-over-year decline.

Why it matters: Investors are already expecting the worst and have a fair idea of McDonald's quarterly performance after management’s mid-quarter update. The company had said that its comp store sales had plummeted 30% during the eight weeks ending May 31. The decline followed a 22% downturn in sales in March.

Despite the gloomy second quarter, investor sentiment is now bullish, expecting the worst to be in the rear-view mirror. The company has already started witnessing positive trends with many locations reopening and a spike in people ordering their favourite Big Macs and fries online. McDonald's witnessed solid sales growth in May, not just in the US, but also in international markets (remember the long queues at McDonald’s drive-throughs after outlets reopened in various countries, from the UK to New Zealand?).

Although the company’s revenues remained below last year’s levels, the gap reduced significantly.

On the other hand, there are other headwinds to consider. The spike in infections in the US remains a concern as does the operating cost of adopting precautionary measures to keep their staff safe from infection. The focus on health and the growing trend of preferring homecooked meals are likely to become impediments in the company’s recovery.

How shares performed so far: Shares of McDonald's have gained 5% with investors expecting some good news about recent trends from the company. The stock has surged around 12% over the past month.

What to watch: As McDonald's does not typically provide any sales projections, investors will be looking for other cues of an improvement in the company’s business. Investors expect management to provide details of customer traffic trends and expect to hear about a strong rebound in Europe and China.

The Markets Today

     

US stocks will be in focus today, ahead of a basket of economic reports scheduled for the day.

Context: US stocks closed higher on Monday, as investors closely monitored additional stimulus announcements from the lawmakers and earnings reports from various major companies.

Details: Technology stocks drove the overall markets higher on Monday, with investors eyeing developments in Washington regarding a major spending plan.

Markets remained cautious, however, due to various geopolitical concerns and rising covid-19 cases in the US. The US was ordered to close one of its consulates in China, after the Trump administration closed a Chinese consulate in Houston last week.

Investors were also looking forward to one of the busiest earnings week, with giants like Apple, Alphabet, Amazon.com and Facebook scheduled to report their results.

On the economic data front, US durable goods orders rose 7.3% in June. Also, the Federal Reserve is scheduled to wrap up its two-day policy meeting tomorrow, with markets not expecting any major announcements from the bank.

After closing the previous week down by 0.8%, the Dow Jones index gained around 115 points to close at 26,584.77 on Monday, while the S&P 500 rose 0.7% to 3,239.41. The tech-laden Nasdaq 100 spiked 1.7% to reach 10,536.27.

What to watch: Investors await the S&P CoreLogic Case-Shiller home price index, consumer confidence index and Richmond Fed manufacturing index from the US.

The S&P CoreLogic Case-Shiller 20-city home price index, which rose 4% in April, is expected to improve at the same rate in May. Analysts expect the Conference Board’s consumer confidence index to decline to 94.5 in July, from the previous reading of 98.1.

Investors will continue to monitor the daily coronavirus numbers, with total infections exceeding 4.2 million in the US.

Other Markets: European indices were trading mostly higher at 8:30am GMT, with the FTSE 100 and Dax 30 index up by 0.3% and 0.4%, respectively, although the French 40 was down by 0.2%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

UK’s CBI distributive trades, Saudi Arabia’s bank lending growth and money supply M3, UAE’s money supply M3 as well as the US Redbook index.