McDonald's Serves Up a Sizzling Third Quarter
Also, IBM and Ford report in with their numbers.
We continued to see signs of strength in McDonald's MCD third-quarter results, announced Tuesday, and our fair value estimate will remain at $33 per share. We think the 5.8% increase in same-store sales, on top of a strong prior-year period, is helping to boost the firm's efficiency thanks to its relatively high operating leverage. Operating profit margins expanded during the quarter to 22.3% versus 21.4% a year ago. We interpret CEO Charlie Bell's comments with respect to staying focused on the "McDonald's Brand experience" to mean that the firm isn't thinking about making any major acquisitions and that it will continue to generate cash which will largely be returned to shareholders via stock purchases and dividends.
IBM IBM reported third-quarter earnings Monday afternoon that were largely in line with our expectations for the global technology firm. Our fair value estimate remains unchanged at $91 per share. The highlight of the quarter was the $320 million pretax charge IBM took to settle some outstanding pension litigation. There are additional pension litigation items outstanding but IBM's liabilities in this matter are capped at a manageable level, a positive for the stock. Operationally IBM remains on solid ground given its results for the first nine months of the year. Revenue growth was fine across services, hardware and software. Gross margins were slightly improved in most businesses except for some modest slippage in the Global Services group, the division that does the consulting, integration and outsourcing work. Margin improvement in the services business has been an ongoing goal for IBM, and it appears management's work there is not quite finished.
Ford F reported third-quarter results Tuesday, with weak performance in automotive operations but strong performance in finance. We anticipated continued weak operating performance, and our fair value estimate remains unchanged. Automotive revenue increased 8.4% over the year-ago period, but the operating margin was flat at negative 2%. Excluding charges, the company lost $402 million in the Americas, compared with a $108 million loss last year, despite increasing the average per car revenue by $423. The company's Premier Automotive Group loss grew to a precharge $171 million, compared with a $20 million loss last year. The division also took a $335 million charge, primarily due to the sale of the company's Formula One racing operations. Other divisions of automotive operations were about flat relative to the year earlier. Financial services turned in profits up 38% to $1.4 billion, primarily driven by better credit loss and lease residual performance at Ford Credit. The low losses and strong residuals at Ford Credit were likely influenced by the company's decision to concede share in favor of pricing, a move that we applaud. We expect a strong product pipeline will generate some operating improvement for the company over the coming quarters, but we remain bearish about the long-term prospects for both the company and the industry, especially until we see a material reduction of global capacity.
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