4 McDonald's Analysts On Whether They're Lovin' Q2 Results

Mcdonald's Corp MCD reported a 30% decline in second-quarter revenue Tuesday and a 68% drop in net income.

The global fast food giant was negatively impacted by the COVID-19 pandemic, but some analysts are optimistic the chain can recover.

The McDonald's Analysts: BofA Securities analyst Gregory Francfort maintained a Buy rating on McDonald's' stock with a price target lifted from $210 to $225.

Wells Fargo analyst Jon Tower maintained an Overweight with a price target lifted from $220 to $222.

KeyBanc Capital Markets analyst Eric Gonzalez maintained an Overweight with an unchanged $215 price target.

Raymond James analyst Brian Vaccaro maintained at Market Perform. 

BofA Bullish On 'McWarChest': McDonald's reported a second-quarter EPS beat of 65 cents versus expectations of 58 cents amid better margins, SG&A and franchise margins that were offset by lower franchise take-rates, Francfort said in a note.

Comps in the U.S. were down 8.7% given that McDonald's has a higher breakfast mix compared to its peers, the analyst said. 

The international business also saw pressure in the quarter, but started showing signs of recovery in June, he said. 

During the quarter, marketing spend was down 70%, but McDonald's will allocate part of its unused advertising budget to create a "McWarChest" that will put pressure on peers in the third and fourth quarters, Francfort said. 

"We continue to like MCD given comfort with its franchisee strength, balance sheet and ability to outperform in a recessionary tight wallet environment." 

Related Link: Price Over Earnings Overview: McDonald's

Wells Fargo's Conference Call Takeaways: The McDonald's second-quarter conference call brought six takeaways, Tower said in a note. They are:

• Third-quarter same-store sales to date in international operated markets are at a negative high-single digit and positive in markets like Australia and Canada.
• A "catch-up" on marketing spend will result in a 30% year-over-year increase in the back half.
• The company gained breakfast market share in the U.S.
• McDonald's still plans to open 400 net new stores in China this year.
• The company will see a source of new cash in the near-term from lowering its ownership in McDonald's Japan.
• McDonald's is pulling forward plans to close around 200 lower-volume stores.

KeyBanc Urges Patience In The Drive-Thru: McDonald's is operating in a new and unusual environment characterized by "limited supply, fewer discounts, and little need for innovation," Gonzalez said in a note.

Some of the Golden Arches' peers started offering discounts over the last few weeks, but McDonald's is akin to a "sleeping giant" and waiting to strike back when the timing is right, the analyst said. 

McDonald's is likely to announce new innovations across breakfast, lunch and dinner to further support sales over the coming months, he said.

"McDonald's remains among our top picks for 2H20 based on its scale, innovation pipeline, off-premise capabilities, and technology investments that should help sustain momentum even if competition intensifies in the months ahead."

Raymond James Says Valuation Elevated: McDonald's stock is trading at a P/E multiple of 25 times on Raymond James' 2021 estimates, an EV/EBITDA multiple of 17 times and a free cash flow yield of 4%, Vaccaro said in a note.

Put in perspective, the P/E and EV/EBITDA multiples are at the upper end of the stock's pre-COVID-19 three-year valuation range of 20 times to 25 times, and 14 times to 17 times, respectively, the analyst said. 

MCD Price Action: McDonald's shares were trading slightly positive at $196.18 at last check Wednesday. 

Related Link: McDonald's Analyst On Chain's 'Double-Digit' Breakfast Decline During Pandemic

Photo by Bryan Hong via Wikimedia.