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Bet on Big Mac
05/04/2017 2:50 am EST
Our upgrade reflects our improved revenue expectations for 2017, driven in part by the launch of new promotional offers, including $1 soft drinks and the Big Mac Trio.
In addition, we expect revenue to benefit from the increasing adoption of the company’s mobile order and pay system and from the renewed emphasis on value menus.
We also believe that income-oriented investors will be attracted to MCD’s nearly 3% dividend yield and record of annual dividend increases.
In our view, the current MCD share price inadequately reflects the benefits of management’s turnaround plan. MCD shares are trading at 22.5-times our 2017 EPS estimate and at 20.8-times our 2018 estimate, compared to a historical range of 8-24.
Based on our expectations for gains from restaurant refranchising, as well as benefits from new promotional offerings and the company’s mobile and order pay system, we believe that a higher multiple is warranted.
Our target price of $158 implies a multiple of 25.1-times our revised 2017 estimate, and a potential total return, including the dividend, of 15% from current levels. Based on the company’s ongoing turnaround efforts and prospects for growth in China, our long-term rating remains BUY.
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