Nomura Downgrades McDonald's On Slowing Comps; Yum Brands Is Top Pick

Nomura has downgraded McDonald's Corporation (NYSE: MCD) to Neutral from Buy amid slowing comps and said its Buy-rated Yum! Brands, Inc. (NYSE: YUM) is its top large-cap restaurant stock pick.

"Our downgrade is predicated on multiple factors, including slowing U.S. restaurant industry same-store sales trends during Q2 and tougher year-over-year comparisons that McDonald's U.S. begins lapping in the not-too-distant future (particularly in Q4)," analyst Mark Kalinowski wrote in a note.

Kalinowski has cut his second quarter U.S. same-store sales forecast for the second time this month, this time by a further 60bp to +2.4 percent, which becomes the new "low on the sell side" forecast, according to Consensus Metrix data.

McDonald's may find it difficult to improve comps despite its recovery efforts such as testing of fresh beef and cost cutting initiatives. The company's results are likely to be pressured as the U.S. burger-sector comps have declined meaningfully in the second quarter, with U.S. restaurant industry comp trends remained weak.

In fact, the analyst noted that his revised estimate of +2.4 percent suggests that the restaurant giant is actually outperforming its burger-sector peers by 150-200bp or so – a negative read-thru for Wendys Co (NASDAQ: WEN).

"[W]ith tougher comparisons coming up for the restaurant industry, for the burger sector, and for McDonald's in Q3 and especially in Q4, odds are that meaningful improvement could be hard to come by over the next three to six months. Worst case, more sequential deceleration could be on the horizon," Kalinowski highlighted.

Kalinowski, who expects the stock to be range-bound for the rest of the year, also slashed his price target to $129 from $142.

At time of writing, shares of McDonald's fell 1.72 percent to $120.52.