Benzinga - by Shanthi Rexaline, Benzinga Editor.
McDonald’s Corp. (NYSE:MCD) shares are down year-to-date despite the fast-food chain being counted among defensive stocks, which typically generate decent returns even when the economy is going through a downturn. An analyst at KeyBanc Capital Markets on Friday weighed in on what’s ailing the stock.
The McDonald’s Analyst: Eric Gonzalez reiterated an Overweight rating and $310 price target for the shares of McDonald’s, suggesting scope for about 23% upside.
The McDonald’s Thesis: Present Tense, Future Perfect?
The 15% year-to-date decline in McDonald’s stock vis-a-vis roughly flat performance for its peer group and the 10% gain for the S&P 500 Index, is uncharacteristic of a brand that has proven resilient through cycles, said Gonzalez in the note.
The stock’s underperformance is attributable to softening global same-store sales trends, including in the U.S., the analyst said, adding that this was the result of consumers getting more circumspect.
Citing proprietary data and industry conversations, the analyst lowered his second-quarter same-store sales estimate for McDonald’s U.S. from 1% to 0%. The year-over-year comparisons for the quarter will likely remain difficult, as it laps the "Grimace Birthday Shake", which went viral last June, he added.
Gonzalez, however, expects domestic same-store sales trends to improve in the second half as year-over-year comparisons ease. The well-publicized $5 meal and a credible replacement of the D123 menu will likely help the company address the affordability gap, he said.
Bloomberg reported earlier this month that McDonald’s was considering the launch of a $5 meal deal, which will likely include a McChicken or a McDouble along with fries and a drink. The rumor came close on the heels of the company reporting weaker-than-expected results for the first quarter.
“We suspect the $5 meal, which is scheduled to run through July, could be extended until a more permanent national value platform is solidified in the fall,” Gonzalez said.
Value War: KeyBanc expects a looming value war like the one seen in 2018. The firm noted that McDonald’s aggressiveness has rubbed off on competitors including Wendy’s Company (NASDAQ:WEN), Restaurant Brands International Inc.’s (NYSE:QSR) Burger King unit, and Jack in the Box Inc. (NASDAQ:JACK). “It would appear like the industry has engaged in a value war—something we last saw in 2018,” it said.
That said, the firm sees differences between the two. “Today's value push is seemingly born out of necessity following year of inflationary pressure that is increasingly weighing on cost-conscious consumers,” it said.
Relative to 2018, McDonald’s is currently in a relatively stronger position, having “remodeled its footprint, invested in digital technology, improved speed of service, reinvigorated its marketing efforts, and driven near record store level cash flows last year—providing headroom to improve affordability,” Gonzalez said.
“These advantages either did not exist or were in their early stages in 2018, suggesting McDonald's is in a better position to drive share gains.”
The analyst said McDonald’s recent underperformance could be an opportunity for investors to get more constructive, adding that its recent underperformance may be an opportunity to get more constructive.
In premarket trading on Friday, McDonald’s edged up 0.33% to $252.90, according to Benzinga Pro data.
Read Next: Not So Happy Meal: McDonald’s Menu Price Has Increased By More Than 100%, Some More Than 200% In The Past Decade
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Latest Ratings for MCD
| Mar 2022 | Northcoast Research | Downgrades | Buy | Neutral |
| Jan 2022 | Barclays | Maintains | Overweight | |
| Jan 2022 | Keybanc | Maintains | Overweight |
View the Latest Analyst Ratings
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