Better Innovation, Value And Technology At McDonald's; Bernstein Upgrades To Outperform

Sara Senatore of Bernstein upgraded shares of McDonald's Corporation MCD from Market Perform to Outperform with a price target boosted from $129 to $160.

According to Senatore, McDonald's stands to gain from food inflation and the restaurant chain's re-commitment to value. In addition, a focus on national advertisements, which showcase promotions should help sustain traffic and comps.

Over the longer term, McDonald's will benefit from menu innovation (Mac Trio, slushies, fresh beef products) as well as the "experience of the future" initiative. The analyst believes this will support an approximate 1-percent comp lift due to improvements in throughput and higher average check prices as customers trade for higher priced food items and discover new products.

Outside The United States

Senatore's bullish stance extends outside of the U.S. markets. Specifically, first quarter comps at McDonald's Japan JV reaccelerated to +15.5 percent, while healthy macro trends are also being seen across Europe.

As such, the analyst believes McDonald's major international markets are also performing well.

Shareholder Friendly Initiatives

Senatore cited McDonald's commitment to return $22 billion to $24 billion in cash to shareholders over the next three years with the potential for further upside if the company takes on additional leverage. Regardless, the cash returns through 2019 alone imply a 15 percent reduction in the share count.

Finally, the analyst is modeling McDonald's first quarter comps to read 2.8 percent (versus the consensus estimate of 1 percent). As such, the company's full year fiscal 2017 earnings per share was raised from $6.27 to $6.38 per share and fiscal 2018's estimates also moved higher from $6.74 to $6.90 per share.

A $160 price target is based on a 23x estimate of the 2018 earnings per share estimate.

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