McDonald's Price Target Cut On Brexit, Channel Checks

While recent McDonald's Corporation (NYSE: MCD) franchisee checks indicate lower U.S. same-store sales, the company may face macro headwinds due to the Brexit decision, Credit Suisse’s Jason West said in a report. He maintained an Outperform rating for the company, while reducing the price target from $135 to $130.

U.S. Channel Checks

Talks with a number of U.S. franchisees indicate a slowdown in McDonald's performance in Q2. Several factors were cited by franchisees for the slowdown, including “broad consumer pullback, weather, oil, softer than expected Monopoly, lapping Sirloin burgers, and slowing tailwind from McPick 2 and all-day breakfast,” West mentioned.

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Europe And UK Exposure

Among the U.S.-listed restaurant firms, McDonald's has the highest exposure to Europe and the UK, at ~37 percent and ~9 percent of global revenues, respectively. “Each 5% move in UK SSS = 0.3% impact to MCD global SSS. Each 1% move in MCD global SSS = ~11c to EPS,” West wrote.

Change In Estimates

The estimate for Q2 U.S. SSS has been reduced from +3.5 percent to +2.3 percent. The estimate for 2Q global SSS has been lowered from +3.7 percent to +3.2 percent. The 2H16 global SSS estimate has been reduced by ~50bps to +2 percent to reflect potential macro headwinds in the US and Europe.

The EPS estimates for 2Q16, 2016 and 2017 have been lowered from $1.41 to $1.40, from $5.57 to $5.52 and from $6.32 to $6.23, respectively. The Outperform rating has been maintained, however, since “MCD tends to hold up better than most in a choppy environment given the defensive nature of its business,” the analyst commented.