Bank of America just completed its monthly check-in on the U.S. restaurant sector, and McDonald’s Corporation (NYSE: MCD) remains one of the firm’s top stock picks. McDonald’s is one of the few restaurant stocks that Bank of America sees consistently beating consensus earnings estimates throughout 2018 and 2019, and analyst Gregory Francfort says the market is undervaluing McDonald’s growth.
Francfort says U.S. consumer disposable income is up 4 percent so far in 2018 compared to 3 percent growth in 2017, which is good news for the restaurant industry. At the same time, wage growth in the restaurant industry is up 4 percent, which eats into profits.
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In addition, a tight job market means many restaurants are struggling to hire new employees. Francfort also says commodity price inflation is likely to pick up in the second half of the year, which will add to overall costs.
Despite the headwinds, Francfort says MCD stock is an excellent value, particularly compared to some of its lower-growth peers.
“One consistent theme from our vantage point is that the market seems to be paying too much for high franchise mixes and not enough for growth, which creates opportunities in the quick service space,” Francfort says.
For example, he says McDonald’s stock and Sonic Corp. ( SONC) shares are trading at comparable free cash flow multiples despite the fact that McDonald’s growth outlook is “substantially stronger.”
Bank of America is projecting 3.5 percent same-restaurant sales growth for McDonald’s throughout the rest of 2018. In addition, Francfort is calling for full-year earnings per share of $7.75 in 2018 and $8.50 in 2019. Both estimates are above Wall Street consensus estimates of $7.66 and $8.27, respectively.
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For the current quarter, Francfort is projecting EPS of $1.96 compared to consensus estimates of $1.94.
“We think a 5.4 percent 2019 [estimated] free cash flow yield is attractive for a business with 1.5 percent unit growth and mid-single digit global comps,” Francfort says.
Bank of America has a “buy” rating and $190 price target for MCD stock, suggesting 14 percent upside from recent levels.
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McDonald’s Corporation (MCD) Deserves Some Respect originally appeared on usnews.com
