Inside Wall Street: Yes, McDonald's Could Add More Sizzle
As one of the world's best- known brands, McDonald's (MCD) is smoking. Its stock has rocketed to a 52-week high of $69.53 a share on Apr. 14, 2010. That's quite a leap from its 52-week low of $51 on May 1, 2009. Continued strong fundamentals in the company that operates or franchises 32,500 restaurants in 118 countries are mainly propelling the stock. So what more is there to say that investors don't already know?
Here's one big question: Is the stock still a buy -- especially for those who missed the big jump -- or is it now time to sell on fear that the stock may have already peaked?
I wouldn't usually think of chasing a stock that has run up as sharply and as fast, but with McDonald's, investors have to consider some important points that may still make it a good buy. The short-term key is it will report its first-quarter on Wednesday Apr. 21. Most analysts expect McDonald's to report first-quarter earnings of 96 cents a share, up from 83 cents a year ago. If it beats that forecast, the stock will soar just like the shares of JPMorgan Chase (JPM) and Intel (INTC) did when they surprised Wall Street with their knockout first-quarter results.
An Upside Surprise Is Tantalizing
Most McDonald's watchers expect the company to meet analysts' estimates, and that's enough of a positive, which should further push up the stock. There's only a slim chance that McDonald's will surprise on the downside. But there's a tantalizing possibility that it will exceed the Street's numbers. That would surely ignite the stock enough to propel it to new highs.
McDonald's may, indeed, rally on a stronger-than-expected earnings surprise. Goldman Sachs strategists John Marshall and Maria Grant note in a report to clients that "potentially strong April earnings" could drive up the stock. They also cite the launch in May of a new smoothie product as a potential positive. And Goldman Sachs analyst Steven Kron notes that McDonald's may advance on accelerating profit-margin gains, and rates it a buy with a 12-month target of $77 a share.
Analyst Mark Kalinowski of Janney Capital Markets on Apr. 14 raised his recommendation on McDonald's to a buy from neutral because he sees "improving same-store sales trends in the U.S." In particular, he raised his forecast on U.S. same-store sales for March to 3% from 1.5%. He based that on the results of Janney's proprietary survey of its franchisees, which provided their best guess on what their same-store sales would be for April.
If McDonald's comes close to 3%, it would be the first month since September 2009 that its U.S. comparative sales would have broken out of the -1% to 1% range. "This would bode well for the remainder of 2010 in the U.S. as year-over-year comparisons are meaningfully easier over May-December," says Kalinowski.
He puts the fair value of McDonald's stock at $75 a share based on his updated 2010 earnings estimate of $4.30 a share on estimated revenues of $23.78 billion, up from $3.98 on $22.74 billion.
Gaining Ground Globally
Investors often wonder whether McDonald's can keep up its strong upward progress. Meeting with management in March "reinforced our view McDonald's can sustain global operating momentum in 2010 -- and longer," says David E. Tarantino, analyst at investment firm Robert W. Baird. By emphasizing the same operating strategies that have proven highly successful in recent years, McDonald's could continue to gain market share across segments of world markets, he says.
Tarantino recalls that management was specifically upbeat on the $1 breakfast menu and its expanded beverage products for the spring and summer, including frappes and smoothies. In Europe, McDonald's is extending hours during the day and increasing drive-through services. McDonald's is also optimistic about its expansion in China where it will open more than 600 new units. McDonald's will likewise expand its franchising and licensing program in that country. Trends in China are stabilizing and improving partly due to "value initiatives," says Tarantino. In Japan, he adds, McDonald's continues to gain market share.
Tarantino rates McDonald's as outperform, saying it's attractive because of its "solid internal fundamentals, stable stream of franchise income and extended track record of healthy operating performance." And he reminds investors that McDonald's has an attractive dividend yield of 3.3%, which is like a bonus for a large-cap stock.
Wall Street is certainly upbeat on McDonald's, with 15 of the 24 major analysts rating the stock a buy, with none recommending bailing out. The eight others rate it a hold. Predictability, the major players in this big-cap stock (market value of $83.8 billion) are the largest stakeholders, headed by Capital World Investment, which holds 67.6 million shares, or 6.28%, and State Street with 44.86 million shares, or a 4.17% stake.
Long-term investors have little reason for not chowing down on McDonald's stock.