Fast Food For Thought: McDonald's Reign As Burger King Remains Unchallenged

Big Blue? Meet Big Mac.

Wall Street often refers to International Business Machines Corp. IBM as “Big Blue” because of its status as a venerable blue chipper. But McDonald's Corporation MCD is another blue-chip stock that has managed to weather the world’s flirtation with healthier food.

In fact, the burger business is back with a belch-inducing vengeance, and McDonald’s is leading the pack.

McDonald's Royalty

Bank of America Merrill Lynch analyst Gregory R. Francfort gives four reasons why the burger king is the best buy in a strengthening sector and three reasons he sees continued upside:

• 1. “30-yr treasury yields falling from 3.0% to 2.87%”
  2. “Fund flows out of retail stocks and into restaurants.”
  3. “Positive sales trends in the category.”
  4. “Higher beef prices potentially forcing franchisees to reduce their aggressive price discounting.”

Related Link: For McDonald’s, The Choice Of Disrupting Or Being Disrupted Was An Easy One To Make

Reasons For Continued Upside

• 1. “Value: Aggressive value plans for early 2018. According to news releases, MCD has tied a 55% reimage contribution to support for a value menu focused around the $1, $2, and $3 price points.
  2. “Unit economics: MCD is one of few restaurant companies that can attain better franchisee economics than peers on lower price points.
  3. “Valuation: On a relative basis to other highly franchised restaurant stocks, MCD continues to screen cheap.”

Francfort set a higher price target of $175. Big Mac closed at $157.30 on Friday, up nearly $35 for the year.

Other Burger Flippers

Francfort moved Sonic Corporation SONC from a Buy rating to Underperform but increased its price target to $30. Sonic closed at $24.06 Friday.

“The stock is up 16% since March 31st (vs the group up 10%) and 29% since March 21,” Francfort noted. “Our downgrade is not a call on this quarter (they report next Thursday) as we see limited downside to 3Q and 4Q (we model flat comps in 3Q and positive 1.5% in 4Q). However, we worry about 2018 earnings, particularly as MCD gets more aggressive.”

As the New York Post noted last week, the fast-food sector financials are healthier than its calorics, with the Big Three — McDonald’s, Burger King QSR) and Wendy’s Co WEN — posting same-store sales increases of greater than 3 percent, which is faster than the U.S. economy’s 2.6-percent growth rate in the second quarter.

McDonald's remains Buy rated with a boosted price target from $165 to $175. Restaurant Brands International remains Neutral rated with a price target increase of $4 to $62. Wendy's rating and price target remain unchanged (Neutral, $17).