McDonald's Serves Up An Appetizing Quarter, Piggybacking On Promotions

McDonald's Corporation (NYSE: MCD) third-quarter performance left sell-side impressed, with firms extolling the company for its stellar showing.

As such, UBS maintained its Neutral rating on McDonald's but lifted its price target from $160 to $170. At the same time, BTIG maintained its Buy rating and $175 price target.

The restaurant chain reported third-quarter adjusted earnings per share of $1.76, up 9 percent. Revenues were down 10 percent to $5.76 billion, even as comps rose 6 percent.

The comps growth in the U.S. of 4.1 percent was 440 basis points above the industry and marked the seventh quarter of outperformance in the last eight, BTIG said.

Promotion Provides Shot In The Arm

BTIG analyst Peter Saleh and Ben Parente attributed the strong sales results in the U.S. to compelling promotions. The analysts believe these promotions will continue to provide a foundation for more sustainable sales drivers like a stronger value platform, digital initiatives and delivery that will increasingly contribute in coming quarters.

The analysts expect these efforts to help McDonald's to continue to outperform the industry, recapture some of the considerable market share it has lost in recent years and widen its gap to other concepts.

See Also: McDonald's Mixed Q3 Leads To Upside

BTIG noted that the company's third-quarter adjusted earnings per share were ahead of its estimate of $1.74, as stronger comps and restaurant margins helped, even as higher G&A and a modestly higher tax rate served as drags.

Management reiterated its plans to roll out mobile order and pay to 20,000 restaurants by the year end, aiming for 2,500 Experience of the Future locations in the U.S. this year. The company also plans to launch a national value platform next year, centered around $1, $2 and $3 price points, with periodic limited-time offers to regain lost traffic.

BTIG modestly increased its 2017 and 2018 earnings per share estimates to $6.52 and $7.12, respectively from $6.49 and $7.08, given the results and stronger sales.

On Track to Meet Elevated Expectations

UBS analyst Dennis Geiger said the ongoing global top-line momentum and multiple recently launched or upcoming initiatives provide good visibility into continued same-store sales outperformance. The analyst likes the company's aggressive approach to sales and other strategic initiatives.

Additionally, Geiger said a progress over perfection mindset should help capture some of the early mover advantages of digital and delivery. The analyst said corporate strategic initiatives remain on track, with upside possible over time.

U.S. share gains are well positioned to continue, given multiple sales drivers, the analyst added.

"While refranchising through 2018 could create some quarterly earnings volatility, we expect as the business model normalizes, operating leverage will be reduced & free cash flow conversion enhanced," the firm said.

However,current valuation already embeds expectations for a greater free cash flow model and strong sales trends in 2018.