McDonald’s (NYSE:MCD) Pops After Upgrade

McDonald’s: The Analysts… Are Lovin’ It

The fast-food industry has had a great year despite the pandemic. The industry is benefitting from a combination of factors that center around social-distancing and McDonald’s (NYSE:MCD) is right in the thick of it. The world’s largest fast-food operator was not immune to the pandemic, far from it, the 2nd quarter results can attest to that. That weakness aside, the company has bounced back in a way that has it set up for gains and the analysts are starting to take note.

The latest nod comes from UBS analyst Dennis Geiger. According to him, McDonald’s is set up for a multi-year advance in comp sales driven by consumer trends and company investment. UBS is expecting McDonald’s to deliver high-single-digit same store sales comps with EPS growing at a 16% CAGR over the next four years. Mr. Geiger upped the rating from neutral to buy with a price target of $240 based on a higher expectation for 2021 EPS and the recent downturn in share prices. With McDonald’s trading near 22.5X its earnings it is not only set up for gains, it provides a value compared to peers that are trading closer to 24X times earnings.

The average rating on McDonald’s is a strong buy and that has held steady over the past three months. While a number of analysts have upped their ratings from neutral to buy an equal number has reduced theirs from strong-buy to buy or neutral. The consensus price target, however, has only risen at the same time and now stands near $240. That’s up nearly $30 or about 14%.

McDonald’s Rebound Gains Strength

McDonald’s reported a decent Q3 despite the 2.2% decline in global comp sales. On a sequential basis, the company reported strong improvement across all operating segments and above the consensus targets. The U.S. business was strongest with a 4.6% YOY gain while International fell only 4.4% versus the 10.5% expected. Sequentially, revenue is improved 44% from the 2nd quarter to the 3rd putting the company on track to resume YOY growth in the 4th. As for the 4th, the first month of the quarter saw U.S. comps accelerate to low-double-digits.

"The resilience of the McDonald's (MCD) system was on display during the third quarter as the competitive strength of our business and the 3 D's – Digital, Delivery and Drive Thru – led to significant global comparable sales recovery," said McDonald's Chief Financial Officer Kevin Ozan.

McDonald’s announced a global rationalization plan along with the 3Q results. Called Accelerating The Arches, the program is intended to enhance, uncover, and unlock growth opportunities across all operating segments. Notably, the plans will focus on 3 D’s; digital, delivery, and drive-thru, a plan I think is right on point. Other fast-food operators (like Chipotle Mexican Grill) that are embracing digital have seen eCommerce sales grow triple digits and account for significant portions of net revenue.

McDonald’s Is An Above-Average Blue Chip Dividend

McDonald’s attractiveness lay not just in its outlook for growth but also in the dividend which too has an outlook for growth. At today’s share prices the stock is yielding about 2.4% which is above the broad market average and sleep-well-at-night safe as well. The payout ratio is running about 83% of this year’s EPS consensus but there are two factors to remember. The first is that consensus is too low, McDonald’s beat the Q3 consensus by $0.32 or 16%, and the second is next year. The next year should see McDonald’s EPS grow at least 30% YOY bringing the ratio down to more comfortable and sustainable levels.

And there is also the balance sheet to think about. This company is well-capitalized with no pressing debt obligations, good coverage, and ample free cash flow. There is absolutely no reason to think it won’t increase the payout for a 20th consecutive year next fall.

The Technical Outlook: Time To Buy Some McDonald’s

Shares of McDonald’s have been pulling back over the last two months but that move is coming to an end. The UBS upgrade has price action up more than 2.25% and looking ripe for a full reversal. The only thing standing in the way now is the short-term moving average and that may not hold prices back for long. The indicators are still mixed but set up to fire a strong buy signal. Stochastic is in the lead and showing a bullish crossover with MACD close behind. A move above the EMA would be the trigger to buy and could produce a 10% upside in the very near-term. Longer-term, investors should expect to see McDonald’s set a new all-time high by the end of the first quarter.