McDonald’s Corporation (NYSE: MCD) has been a top performer for investors so far in 2017, gaining 33.8 percent and more than doubling the return of the Standard & Poor’s 500 index.
But with the restaurant sector gearing up for what could be a challenging finish to 2017, Stephens Inc. analyst Will Slabaugh says long-term investors should continue to place their trust in the Golden Arches.
According to Slabaugh, McDonald’s is pulling all the right levers to impress Wall Street when it reports its third quarter earnings on Oct. 24. Stephens is expecting McDonald’s to deliver another earnings beat and report same-restaurant sales growth of 3.5 percent, topping consensus analyst estimates of 3.4 percent.
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
“We remain positive on MCD as 3Q approaches for what we believe has been sustained sales momentum, visible catalysts into [fiscal 2018], a more aggressive improvement of an already-string franchisee base, and a relatively conservative balance sheet that makes its near-historically high valuation more reasonable versus some peers,” Slabaugh says in a report.
After speaking with industry experts, Slabaugh believes several key McDonald’s menu promotions have performed extremely well. He has heard positive feedback related to the $1 soft drink, $1 small coffee and $2 espresso beverage promotions. In addition, Slabaugh says bundle value deals, such as the McPick 2 Menu, are helping McDonald’s win back fickle value-oriented customers from Restaurant Brands International Inc ( QSR) and Wendy’s Co. ( WEN).
Slabaugh says McDonald’s will likely continue to target value offerings in the $2 to $3 range. In terms of long-term growth catalysts, he says expansion of McCafe offerings and a shift to kiosk ordering are major profit drivers. Stephens estimates that McDonald’s generates roughly 10 percent more sales per kiosk order than it does per traditional order, mostly due to additional dessert items.
For restaurant investors looking for other stock ideas, Slabaugh says fast food is the group of choice headed into third-quarter earnings season.
[See: 8 Stocks to Profit From America’s Love of Burgers.]
“Given a solid year-to-date performance and the ongoing volatility and negative sentiment around casual dining, we believe that quick-service restaurants continue to be viewed as the safer place to be, which is supported by current valuations at 15 percent above the group’s five-year average,” he says.
Stephens has “outperform” ratings on the stocks of McDonald’s, Restaurant Brands International, Wendy’s, Dominos Pizza ( DPZ) and Carrols Restaurant Group ( TAST).
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McDonald’s Corporation (MCD) Stock Still on the Value Menu originally appeared on usnews.com
