Analysts Share Positive Outlook for McDonald’s After Share Price Surges

McDonald's on N Clark St
McDonald's gets positive ratings from analysts at the beginning of 2016. (Ashesha Mehrotra/MEDILL)

By Ashesha Mehrotra

Analysts are becoming increasingly optimistic about the future of McDonald’s Corp., after the company started 2016 on a positive note with a sharp rise in its stock price since last year and reported a gain in the U.S. comparable sales for the first time after 2013.

After years of slumping sales and reports of poor customer service, McDonald’s turnaround strategy, which includes healthier menu options, drive-thru gourmet and all-day breakfast, seems to be paying off.

MCD stock closed at $117.58 on Jan 4. 2016, up a whopping 25 percent from $94.13 at the start of 2015. The stock had hit a record high of $118.14 on Dec. 31, 2015.

“Sales trends have improved at MCD that explains the stock’s rise. Sales are faster due to faster drive thru times, lower gas prices that have helped consumers with the ability to spend more on out to eat meals, and the rollout of all day breakfast. Hopefully, more to come from MCD in 2016,” said Jack P. Russo, an analyst at Edward Jones, in an e-mail.

Earlier this month, Nomura Securities and Zacks Investment Research upgraded their rating to buy for the stock. Both organizations predicted a target price of $135 for the fast-food chain, a 15 percent increase from the current price of $117.50.

McDonald’s stock prices Jan. 2015- Jan.2016

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MCD stock finished 2015 on a high note as its stock ended gaining nearly 26 percent and analysts predict that it will continue to rise further in 2016. All prices in USD. (Ashesha Mehrotra/MEDILL)

Analysts at Zacks said that the company’s focus on product innovation, digital media and efforts to customize burgers through programs such as “Create Your Menu” are helping it to regain its lost glory.

Additionally, the management’s strategy is to franchise 93 percent of its restaurants as opposed to the present 81 percent, from 3,500 restaurants to 4,000 restaurants, by 2018.

By restructuring its global model through selling more restaurants to franchise operators and regrouping its market abroad into various categories, the company estimates a reduction of $300 million in its annual sales, general and administrative costs, a goal expected to be fulfilled by the end of 2017.

This will increase free cash flow, allowing reinvestment for an improved brand recognition and shareholder return, said analysts in the latest Zacks Equity Research Report on McDonald’s.

R.J. Hottovy, consumer equity strategist at Morningstar, stated in an online report, “We appreciate McDonald’s aspirations to becoming a nimbler organization, particularly with respect to making more menu and marketing decisions at the local and regional level.”

McDonald’s reported earnings of $1.31 billion, or $1.40 per share, for the quarter that ended Sept. 30, up from $1.06 billion, or $1.09 per share, a year earlier.

McDonald's stock price shot up after it introduced the all-day breakfast option in October 2015.  (Ashesha Mehrotra/MEDILL)
McDonald’s stock price shot up after it introduced the all-day breakfast option in October 2015. (Ashesha Mehrotra/MEDILL)

The main aim for the brand has been “repositioning McDonald’s as a modern, progressive burger company” and “improving consumer perceptions” of quality, said its president and CEO Steve Easterbrook, during the third-quarter earnings call in October.

Analysts also like the consistent rewards to shareholders through share repurchases and high dividends. The company is known for increasing its dividend every year since beginning payouts in 1976. It last bumped the dividend, by 5 percent, in September 2015.

However, perhaps incongruously, in the face of all this optimism the consensus estimate of 27 analysts polled by Bloomberg is EPS in the current quarter of just $1.22, the same as last year.

Analyst Ivan Feinseth of Tigress Financial Partners, who maintains a neutral rating on the stock, wrote in a report, “We believe that MCD’s shares have gotten ahead of tangible signs that its turnaround efforts are taking hold. As a result, the company’s evaluation metrics are high, given the uncertainties about its plans and its Performance Metrics that continue to deteriorate.

Nevertheless, the company expects to report positive fourth quarter comparable sales in all segments; it reports on Jan. 25 before markets open.

Shares of McDonald’s closed Tuesday at $117.50, up 2 percent from Friday’s close.

Photo at top: McDonald’s gets positive ratings from analysts at the beginning of 2016. (Ashesha Mehrotra/MEDILL)