McDonald’s Corporation (NYSE: MCD) stock is up more than 2 percent this week after the company reported a big first-quarter earnings beat on Monday. Bank of America analyst Gregory Francfort says investors can expect more earnings beats from McDonald’s over the next two years.
According to Francfort, McDonald’s is uniquely positioned to continue to gain precious market share from its restaurant competitors. “We like owning a business that is a low-cost producer with best-in-class unit economics that is reinvesting profit upside back into traffic gains, which MCD appears to be doing,” Francfort says.
[See: 10 Restaurant Stocks to Watch This Earnings Season.]
He says McDonald’s scale advantages allow the company to use its pricing leverage to push value menu offerings and lure traffic away from smaller restaurants. McDonald’s two-for-$4 breakfast promotion in response to soft breakfast sales is a perfect example, and Francfort says he expects breakfast sales to rebound in the second quarter.
McDonald’s has been offsetting its lower-end Dollar Menu prices by raising them on the menu’s premium end. The company said on its earnings call that customers who order off the Dollar Menu tend to buy more items than other customers, and also, many customers are choosing to tack on a single Dollar Menu item to their regular meal order.
Morningstar analyst R.J. Hottovy says the new menu tweaks should help support same-restaurant sales.
The ongoing benefit from menu price increases of 2 to 3 percent (to offset value initiatives) and an increase in the number of items per transaction due to its $1-$2-$3 menu should keep U.S. comps in the 3 to 4 percent range for the rest of 2018, Hottovy says.
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
Bank of America is projecting $7.75 in earnings per share from McDonald’s in 2018 and $8.50 in EPS in 2019.
“We expect to see momentum in U.S. sales as we progress through the year, and we remain materially above the Street for [earnings before interest, taxes, amortization and depreciation] and EPS for 2018 and 2019,” Francfort says.
Bank of America has a “buy” rating and $190 price target for McDonald’s. Morningstar has an “undervalued” rating and $190 fair value estimate for MCD stock.
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McDonald’s Corporation (MCD) Is Gobbling Up Market Share originally appeared on usnews.com
