A Tale of Two Earnings Announcements

McDonald’s Corp. (MCD) and Wendy’s Co. (WEN). Both are international fast food joints that have been serving burgers and fries since the mid-twentieth century. Both are American institutions known worldwide by their red and yellow logos. And, just a few weeks ago, both company’s stocks were basically moving in lock-step for 2013:

But all that changed in July. This month, WEN has been on a tear, gaining over 23%, while MCD has failed to move.

What happened? Well, earnings season happened. With one big earnings announcement coming out after another, Wall Street is parsing through all this data to separate the winners from the losers. And in the case of Wendy’s and McDonald’s, it’s clear which was which.

The Winning Wendy’s

On Tuesday, shares of Wendy’s Co. soared to a new high after it announced strong second-quarter results. According to management, the company has been working overtime to transform its image and optimize its restaurant portfolio. So the company turned a profit of $12.22 million—this is a complete turnaround from Q2 2012, when Wendy’s reported a net loss of $5.49 million. Meanwhile, adjusted earnings weighed in at $0.08 per share, which trumped the $0.06 consensus estimate by 33%.

But what really excited investors was the company’s bullish outlook for fiscal 2013. Looking ahead to the full-year, Wendy’s expects adjusted earnings in a range of $0.20 and $0.22 per share, in line with the Street view of $0.21 per share. The way things are shaping up, the company expects to hit the high end of this range.

Buoyed by these results, Wendy’s rewarded its shareholders. The company’s Board of Directors authorized a 25% hike in its quarterly dividend. Shareholders of record on September 3 will received $0.05 per share on September 17. And that’s not all—the company revealed that it plans to start buying back its stock in the third quarter. With these strong results, I feel comfortable maintaining this stock’s buy rating.

Trouble Under the Golden Arches

On the other hand, McDonald’s reported lukewarm results for the second-quarter. The company was slammed by weak sales in Europe and Asia and currency headwinds so both sales and earnings missed estimates.

Compared with Q2 2012, net income inched up to $1.4 billion, or $1.38 per share. Analysts had projected earnings of $1.40 per share. Meanwhile, total revenues climbed just 2% to $7.08 billion, also missing the $7.09 billion consensus estimate.

The straw that broke the camel’s back was that McDonald’s expects global same-store sales to remain flat for the rest of the year. So shares gapped down at Monday’s open and haven’t regained their ground since. It’s no secret why I haven’t recommended MCD as a buy in over a year.

Even so, what’s particularly striking about this stock’s pullback was that just recently MCD was a darling of institutional investors. It was a regular placeholder in vehicles like ETFs and big index funds, and that helped put a floor under the stock in early 2013.

The Bottom Line

But all that has changed with the earnings shakeout, as you can see from the chart below. WEN (in blue) gapped up immediately following its earnings announcement while MCD (in red) fell to a one-month low. While the two stocks moved in tandem for the first half of this year, their latest earnings announcements proved that the two companies couldn’t be on more different growth paths.

This tale of two earnings reports taught some investors a tough lesson: During earnings season, fortunes can change on a dime. Last month’s institutional darling can become this month’s pariah (and vice versa).

As it happens nearly every year, the flows that fund the market are becoming more erratic, so only quality stocks are going to rally from here on. So there’s no time to waste—please continue screening your stocks through my Portfolio Grader tool to assess the fundamental health of your portfolio.


Louis Navellier

Louis Navellier

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