Analysts Get Bullish On McDonald’s, So Should You (MCD)

McDonald’s Is Best-In-Breed, What Else Is There To Say?

There is a lot to love about McDonald’s (MCD) so it is no wonder the analysts are bullish. The company has been effecting a successful turn-around for years, it is insulated from the pandemic, it’s got growth in the forecast, and it pays a nice dividend. In terms of the broad-market rebound and where to put new money to work, McDonald’s is a top-tier choice and safe-play for dividend-growth investors.

Today’s news only emphasizes that point. Not one but three analysts have come out in the last two days to cheer McDonald’s and it’s prospects for the year. The statements come after the company revealed sequential improvement in comps beginning late March that put it on track to exceed expectations.

Baird’s David Tarantino says “We are raising our 2020 comps/EPS estimates based on this morning's indication that quarter-to-date comps are running ahead of our prior assumptions and that MCD is making significant progress on re-opening units that have been temporarily closed. We continue to believe MCD is among the best-positioned restaurant chains to navigate the COVID-19 crisis and emerge on the other side with good brand momentum.”

What The Analysts Are Saying

The hubbub among sell-side analysts is that McDonald’s is going to scoop up market share during the pandemic. The pandemic has sparked massive turmoil within the restaurant industry that McDonald’s is uniquely positioned to capitalize on. To that end, the company is planning to increase its advertising in the 2Q period to enhance campaigns already in place.

Cowen analyst Andrew Charles said in his note to clients "We are pleased to see global sales heading in the right direction from April to May; … McDonald's is seen well-positioned to gain more market share based on competitive advantages in scale and a further stage of U.S. store remodels that could be completed before peers in 2021-22 due to stronger franchisee cash flows.”

The consensus rating for the stock is bullish to very bullish with none of the 35 current ratings less than neutral. Of the 35, 10 are neutral and half neutral/bullish so there are still some analysts sitting on the sidelines. The consensus target for the stock is $207 or about 8.5% upside from today’s prices. The high-water mark is held by Guggenheim at $239, more recent price-iterations have the stock pegged in the $220 to $230 range or 17% upside.

A Prince Among Dividend Payers

McDonald’s isn’t a Dividend King but not far from it. The company has been increasing its distributions faithfully for over 40 years so there is little fear it will be cut. At today’s prices, the yield is about 2.6% which, in my book, is decent enough to beat the broad market and blow away U.S. bonds. The payout ratio is a bit high for this year at 88% but that is a one-off event. The company, like most in the market, will experience a downtick in revenue/EPS because of the virus but return to sequential growth in the second half and YOY growth next year.

Looking at the balance I don’t see anything to make me worry. McDonald’s has some debt but the load is light and well-managed. Balancing that is a fairly substantial cash-position that is more than enough to ensure safe operations under the current conditions.

The Technical Outlook: Bullish With An All-Time High In Sight

A quick look at the chart will show you the analyst’s consensus price target is pretty conservative. At $207 it is well below the current all-time high and my current target for price action. The weekly chart shows a strong bounce and clear uptrend from the March low that is supported by the indicators. Both MACD and stochastic are bullish and rising with plenty of room to run so a test of the all-time high may be the least of what we see unfold. Once McDonald’s delivers sold proof of its rebound, in the form of EPS reporting, I expect the analysts will begin raising their ratings and price targets.