McDonald's Stock Could Rise on More Makeovers
Barron's
Oct 22, 2018
McDonald's (MCD) has lagged the market this year, and while third-quarter earnings may not wow, analysts expect better times ahead for the stock.
Where we were: McDonald's is down more than 3% year to date, a stark contrast to its strong 2017 performance.
Where we're headed: Remodeling stores may weigh on comparable sales when McDonald's reports results early Tuesday, but analysts believe those projects will become tailwinds soon enough, brightening the 2019 outlook for the stock.
McDonald's hasn't kept pace with the broader market in 2018, hurt by headlines about health concerns, slower-than-expected sales, and higher expenses at the fast-food giant. Therefore, the company's upcoming third-quarter earnings report may reflect some ongoing weakness -- but that doesn't mean that the stock can't rise.
Several analysts have positive things to say about McDonald's on Monday, ahead of the report. Gordon Haskett's Jeffrey Farmer initiated coverage with a Buy rating and $185 price target. Part of the higher spending at McDonald's are allocated to outlet remodels: These represent a tradeoff, because while the stores are undergoing the process, costs go up and traffic slumps. However, as Farmer notes, the investment seems to pay for itself, as "traffic lifts from the larger-scale remodels in our analysis ranged from 5% to 30%, and averaged 17%."
No wonder then, that McDonald's has been more aggressive about remodels in recent quarters, a factor that hasn't done much to help comparable-store sales but should lead to future tailwinds. As such, Farmer expects investors will look past the short-term same-store sales weakness "in recognition of the long-term competitive advantages that will come with McDonald's operating the most contemporary and digitally advanced restaurant system in the segment."
As for the third-quarter report itself, SunTrust Robinson Humphrey's Jake Bartlett expects McDonald's same-store sales and earnings per share will miss expectations, but he reiterated a Buy rating and $186 price target, as he sees this already priced into the stock. Like Farmer, he points to multiple sales catalysts that will re-energize same-store sales in the fourth quarter and into 2019. So while he the third quarter may be a disappointment -- especially as fast-food firms have stepped up competition on the value front -- there are reasons to be bullish as 2018 draws to a close, including traction for its dollar menu, digital ordering and pay options, and increasing marketing for delivery options.
Telsey Advisory Group's Bob Derrington is largely on the same page. He reiterated an Outperform rating and $175 price target on McDonald's Monday, writing that global same-store sales for the company should come in at 3.6% in the third quarter, just shy of the 3.7% consensus, led by strength in the international divisions. He also sees remodeling becoming less of a headwind as projects wrap up and newly reopened stores begin to see the subsequent traffic bump, leaving him optimistic about comparable-store sales in 2019.
McDonald's is down 0.7% to $166.33 in recent trading.