McDonald’s Corporation (NYSE: MCD) stock is off to a tough start to 2018, down 8.2 percent so far this year. However, BMO Capital Markets analyst Andrew Strelzik says McDonald’s lackluster sales and earnings numbers to open the year are only temporary, and long-term investors don’t need to lose faith in the Golden Arches.
Strelzik has lowered his first-quarter estimates for same-restaurant sales growth to just 1.5 percent and has reduced his earnings per share estimate by 2 cents to $1.62.
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
He says estimates beyond the first quarter remain the same, and same-store sales growth will bounce back in subsequent quarters and reach 4.1 percent for the full year. Strelzik says heavy investments in the technology-centric Experience of the Future initiative should boost U.S. same-store sales growth by 0.5 percent. Last month, Bank of America reported that McDonald’s investments paid off in 2017 by landing the company $300 million in sales from market share gains alone.
McDonald’s reported full-year same-store sales growth of 5.3 percent in 2017, one of the strongest performances in the large-cap fast food space. BMO predicts wage growth among the lower 50 percent of U.S. earners will grow faster than wage growth among the top 50 percent this year. BMO estimates that 85 percent of McDonald’s customers fall below that 50 percent income threshold.
McDonald’s stock has lagged the Standard & Poor’s 500 index by roughly 10 percent since the company last reported earnings, and Strelzik says there are several reasons why the stock now has an appealing valuation.
“Against lowered near-term expectations and valuation discount to peers, we expect US comps to reaccelerate and investor focus to return to MCD’s strong cash flow profile on normalized capex,” Strelzik says.
He estimates McDonald’s will hit a $7 billion annual free cash flow run rate by 2020.
In addition, McDonald’s stock currently trades at an earnings multiple discount to its peers despite its above-average growth rate.
[See: 7 of the Best Stocks to Buy for 2018.]
For now, Strelzik says McDonald’s investors should keep first-quarter expectations tempered, but the company is still well-positioned for the longer term.
“McDonald’s is, in our view, an attractive investment as a premium brand in the midst of a turnaround with a favorable risk/reward profile,” Strelzik says.
BMO has an “outperform” rating and $190 price target for MCD stock.
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What’s Wrong With McDonald’s Corporation (MCD) Stock? originally appeared on usnews.com
