July 26, 2016 (McDonald's Earnings Results and New Home Sales)

Close to 40% of the S&P 500 will report their quarterly results this week. That includes McDonald's, which will report before the open on Tuesday.  That report, and the New Home Sales report for June, will be two of the key items to watch. 

(1) McDonald's Second Quarter Earnings Report (before the open)

    • Importance:
    • MCD is the seventh highest-priced stock in the price-weighted Dow Jones Industrial Average
    • Company, including franchisees, is one of the largest employers in the U.S., so what it says about wage trends will carry some influence in terms of affecting inflation expectations and profit margins for industry peers and other services-providing companies
    • McDonald's is a multinational company, deriving close to 70% of its 2015 revenue outside the U.S., so it provides telling insight on global consumer spending activity and the impact of foreign exchange
    • Shares of MCD are up 8% year-to-date and 32% over the last 52 weeks, reflecting the company's improved operating performance and investors' heightened expectations that the encouraging results and guidance from McDonald's will continue.  Failure to deliver on those expectations could prompt a material drop in its stock price.
  • April Q1:
    • Q1 comps benefited from tailwinds that are not necessarily recurring, such as Leap Day, milder weather, and a strong sales recovery in Japan
    • Expects macro uncertainties and decreasing consumer purchasing power to remain headwinds through the rest of 2016
    • Expects existing labor pressures to negatively impact U.S. company-operated margins by 350 to 400 basis points in the second quarter
    • At current rates, currency translation is expected to be less of a headwind, and is now estimated to negatively impact the second quarter by $0.02 to $0.04 per share and the full-year by $0.05 to $0.07 per share
    • Believes there is strong momentum in all of its markets
    • Remains on track to achieve its net annual G&A savings target of $500 million, the majority of which is expected to be realized by the end of 2017

Options Activity:

A large sweep of September 130 Calls were bought in MCD which leads to the notion of further upside for the next sixty days or so.

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Stocks to watch:

  • YUM Brands (YUM)
  • Wendy's (WEN)
  • Jack in the Box (JACK)
  • Restaurant Brands International (QSR) [parent of Burger King and Tim Hortons]
  • Panera Bread (PNRA)
  • Shake Shack (SHAK)
  • Bojangles (BOJA)
  • Starbucks (SBUX)
  • Dunkin Donuts (DNKN)
  • Consumer Discretionary Select Sector SPDR (XLY)... MCD is fifth largest holding at 4.73% of assets

New Home Sales Report for June (10:00 a.m. ET)

  • Why it's important
    • New sales are seen as a big indicator for economic activity. This will give some insight to the strength of the local economy.

Existing home sales are counted when the sale of the property actually closes

  • New home construction creates jobs and spending on building materials, so the report offers some insight on the potential multiplier effect of new home construction
  • New home sales in May were at a seasonally adjusted annual rate of 551,000, down 6.0% from the revised April rate of 586,000 and below the prior 3-month average of 544,000.  
    • The weakness in May featured a 33.3% decline in sales in the Northeast.  All regions saw a sales drop with the exception of the Midwest (+12.9%).