Quick-serve restaurant stocks have been on a tear in recent months, climbing an average of 10 percent since the end of March. However, Bank of America analyst Gregory Francfort says investors should still have plenty of appetite for McDonald’s Corporation (NYSE: MCD) stock.
McDonald’s stock is already up 28 percent in 2017, and investors still have several reasons to expect that momentum to continue in the long term. McDonald’s is reportedly working on a repurposed value menu with $1, $2 and $3 price points. Bank of America also estimates that McDonald’s has the higher post-royalty, post-rent earnings before interest, tax, appreciation and amortization margins than any of its fast food peers.
[Read: McDonald’s Wants to Make You Better Burgers.]
“MCD is one of few restaurant companies that can attain better franchisee economics than peers on lower price points,” Francfort says in a research note.
Finally, even after its 2017 run, McDonald’s stock still trades at a valuation discount to peers. Bank of America has raised its price target for McDonald’s stock to $175, which represents an enterprise-value-to-EBITDA multiple of only 16 based on the firm’s fiscal 2018 earnings estimates.
Francfort says the struggles of clothing retailers such as Macy’s ( M), J C Penney Co. ( JCP) and Kohl’s Corp. ( KSS) are driving retail investors into restaurant stocks. In addition, restaurant sales have been trending higher and rising beef prices have discouraged franchisees from aggressive pricing promotions.
[Read: Stock Market Showdown: McDonald’s vs. Burger King.]
In addition to McDonald’s, Bank of America maintains “buy” ratings on Domino’s Pizza ( DPZ) and Jack in the Box ( JACK).
“Part of what makes us confident in focusing on MCD and DPZ shares is that stronger franchisee economics provides more protection from industry downside risks,” Francfort said.
Bank of America has a $235 price target for Domino’s and a $118 price target for Jack in the Box.
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Fast Food Restaurant Stocks Offer a Safe Haven originally appeared on usnews.com
