Credit Suisse McDonald's Channel Checks Suggest Sluggish Comps Growth

Credit Suisse’s Jason West believes the recent pullback in McDonald's Corporation (NYSE: MCD) shares suggests that investors are already pricing in disappointing Q4 results for the U.S. business.

West reiterated an Outperform rating on the company, with a price target of $132.

Sluggish Comps

The analyst mentioned that recent U.S. franchisee checks, to assess sales trends Q3 to date, suggest that U.S. same store sales remained sluggish during July and August, and are likely to continue in the 1–2 percent range, which appears to be mostly in line with investor expectations.

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“Looking ahead, MCD operators are looking forward to the relaunch of All-Day Breakfast (ADB) advertising in the coming weeks, though expect SSS to be ~flat to slightly down in 4Q due to difficult compares,” West stated.

Trends To Persist

The analyst believes sales trends continue to be challenging across the restaurant industry, while viewing McDonald’s defensive characteristics as attractive against the backdrop of the current environment.

West went on to say that for 2017, 85 percent of the estimated earnings growth is expected to be driven by G&A cuts and share buybacks, which offers high visibility into growth despite the uncertain environment.

Discount Unjustified

While pointing out that McDonald’s stock was trading at a discount to its franchised QSR peers, the analyst expressed the opinion that the discount is unwarranted “in light of the array of positive drivers that have emerged at MCD over the past few quarters: rising franchise mix, cost savings, improving brand perception, enhanced product offerings and more aggressive deployment of the balance sheet.”

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