Many of the words emerging from management at McDonald’s Corporation (MCD) in recent months have had one common theme that goes like, “We have a turnaround strategy and it’s working.”
It appears Wall Street is beginning to believe that message — or at least analysts at Credit Suisse do, as they raised their price target on McDonald’s to $135 a share from $130 a share.
In short, Credit Suisse analysts raised their first U.S. quarter same-store sales growth estimate to 4.5% from 3.8%, owing to “positive franchisee checks.”
Channeling the higher same-store sales growth estimate, Credit Suisse analysts say they expect McDonald’s first quarter EPS to clock in at $1.16, a cent higher than its previous $1.15 estimate.
One other factor they expect to give a positive push to McDonald’s EPS is the U.S. dollar’s recent weakness. These two positive factors combined have also made Credit Suisse analysts raise their full-year 2016 EPS estimate to $5.45 from $5.37. That new full-year estimate is six cents above consensus.
How did they get the information that McDonald’s U.S. same-store sales could grow as estimated? They checked with their McDonald’s franchise contacts and found that same-store sales growth for the first quarter is “comfortably in the mid-single digit” region. According to analysts at Credit Suisse, the positive same-store sales trend is holding thanks to improved operational efficiency, fruitful value promotions and all-day breakfast improvements.
Credit Suisse has stated a convincing argument as to why we should expect an impressive same-store sales growth when McDonald’s announces its Q1 results before the market opens on April 22.
By the way, McDonald’s reports its same-store sales as “comparable sales.”
McDonald’s Investors Should Be “Lovin’ It”
This report from Credit Suisse is saying more than, “hey, McDonald’s will report impressive same-store sale for the first quarter.” It actually highlights that McDonald’s have a working recovery strategy.
As I pointed out previously, it began by simplifying its menu, as well as becoming a “healthier” restaurant. The more popular move was its introduction of all-day breakfast. Recall that an NPD study found that a third of those who bought breakfasts during a time that’s not traditionally breakfast time were new customers.
That Credit Suisse is saying that all-day breakfast is still having significant positive effect on same-store sales means that it was well thought out and executed. You’d understand how this is working when you consider that breakfast menu sales account for a fourth of McDonald’s total sales, according to Zacks.
MCD stock also recently introduced the McPick 2 value platform, which allows customers to pick two menu items for $5. In an age where everyone seeks value, this move will continue to help McDonald’s to regain the customers it lost during its troubled years.
Yes that’s good for consumers, but won’t that hurt bottom line?
Generally, it would hurt bottom line because this kind of offering would discount McDonald’s top line. However, it seems MCD management considered this in their turnaround strategy, since MCD stock has also reduced its total expenses by over a billion dollars since the end of 2014.
If that continues, then the new value strategy won’t hurt the bottom line too much. And as store traffic increases, the effect of this should become negligible.
Bottom Line for MCD Stock
McDonald’s has a history of consistently paying dividend since 1976 and a current yield of about 2.9%, and the ongoing turnaround should spread growth over several years.
This could make McDonald’s rewarding for income hunters to buy and hold.
As of this writing, Craig Adeyanju did not hold any of the aforementioned securities.
