McDonald's: Buy The Pullback, Says BMO

Market overreaction to concerns over McDonald’s Corporation MCD’s soft near-term comp trajectory has created a buying opportunity, according to BMO Capital Markets. 

The Analyst

Analyst Andrew Strelzik reiterated an Outperform rating and $190 price target on McDonald’s.

The Thesis

Despite alarming investors and triggering a pullback, same-store sales softness will likely prove to be temporary, Strelzik said in a Monday note. (See the analyst’s track record here.)

McDonald’s has a "solid playbook of internal initiatives,” and wage growth among the lowest 50 percent of earners is likely to reaccelerate comps, according to Strelzik, who maintained a 3-percent same store sales growth outlook beyond the first quarter. 

McDonald’s cash flow generation outlook still remains strong — the company should generate roughly $7 billion of run-rate free cash flow early in 2020, according to BMO — and will still make the stock attractive once comp growth re-accelerates, the analyst said.

“As MCD’s comp softness proves temporary, investor focus likely will revert to its free cash flow potential in a normalized capex environment.”

Price Action

At the time of publication, shares of McDonald’s were trading up 0.4 percent at $157.89. BMO’s $190 12-month price target implies 16.8-percent upside.

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