McDonald's Turnaround Efforts, Growth Prospects Lead To Upgrade

McDonald's Corporation MCD won over a Wall Street analyst after its earnings report, as Argus' John Staszak upgraded the stock from Hold to Buy with a newly established $158 price target given the fast food chain's turnaround efforts and growth prospects.

McDonald's 2017 revenue is now expected to decline 6.6 percent from a year ago to $22.9 billion which represents an improvement from his prior 8.5 percent decline estimate. The revised outlook now assumes a 2.5 percent increase in comp sales (up from a prior 1.5 percent estimate) and an operating margin of 36.1 percent (up from 32.9 percent) from higher margins available from refranchised restaurants.

The analyst also highlighted lower commodity prices and initiatives to lower operating expenses as benefiting factors, but increases in the minimum wage in various states will offset some of the benefits.

At the restaurant level, McDonald's promotional offers such as $1 drinks and Big Mac Trio, along with mobile order and pay systems will also support upside.

Given all these factors, Staszak boosted his 2017 earnings per share estimate from $6.20 to $6.30 while his 2018 estimates also moved higher from $6.70 to $6.80.

Shares Are Undervalued

Staszak believes the various initiatives to boost sales and improve margins aren't reflected in McDonald's stock. Specifically, shares are trading at 22.5x his 2017 earnings per share estimate at 20.8x his 2018 estimate.

This compares to the stock's historical range of 8-24 but the analyst feels that a 25x multiple on his 2017 estimates are more appropriate.

See Also:

Restaurant Analyst: McDonald's U.S. Turnaround Is Happening

McDonald's Is In A 'Sweet Spot' To Hit 2019 Targets; BMO Initiates At Outperform