Morgan Stanley: The Street Underestimates McDonald's Store Remodel Story

Mcdonald's Corp MCD continues to invest in its business through store remodels and its "Experience of the Future" and the potential positive impact is underappreciated by the Street, according to Morgan Stanley.

The Analyst

Morgan Stanley's John Glass upgraded McDonald's from Equal-Weight to Overweight with a price target lifted from $173 to $210.

The Thesis

McDonald's ongoing investments in store remodels is likely impacting U.S. same-store sales by more than the 50 basis points year-to-date management guided to, Glass said in a note. However, the "tipping point" where benefits from early remodels outweigh any near-term negative impact from closure times and sales recovery.

By the end of 2018, Glass said the company will likely complete 14,000 U.S. store remodels and the "point of maximum pressure" on comps will occur within the next two quarters and sales will likely sequentially improve after. Over the coming three years, McDonald's free cash flow growth is likely to accelerate from 2 percent in the past three years to a 13 percent compounded annual growth rate.

McDonald's is considered the sole "defensive restaurant stock" under Morgan Stanley's coverage given its history of outperforming the market during economic slowdowns, the analyst said. McDonald's also offers investors a "stabilizing, defensive counterbalance" in today's volatile market as the stock outperformed the market on average by 70 basis points when the S&P 1500 index was down for the week and the Volatility Index was higher.

Price Action

Shares of McDonald's were trading higher by 1.4 percent to $190.50 early Thursday morning.

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