‘More nimble, contemporary’ McDonald’s earns stock an upgrade

McDonald’s digital efforts are among the reasons Jefferies upgraded the fast-food giant’s stock

McDonald’s Corp. was upgraded to buy from hold at Jefferies on Tuesday, with analysts praising a variety of efforts at the fast-food giant, from digital initiatives to delivery efforts with UberEats.

The moves make the fast-food chain “a more nimble, contemporary” business that will gain market share, analysts led by Andy Barish wrote. The changes will support a 3% U.S. same-store sales rise through 2020.

Jefferies raised its price target to $200 from $150. Shares closed Tuesday down 0.4%.

“Additional efforts around national value (to come in early 2018), quality, premiumization (fresh beef in quarter-pounders, Signature Crafted), and beverages could layer additional sales on top while other QSR [quick-service restaurant] players scramble to keep up with the technology leadership McDonald’s established in 2017,” Jefferies wrote.

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McDonald’s MCD, +0.28% said Tuesday that it will launch a new tiered value menu on January 4 that will include a breakfast, burger, chicken and drink option at each level. Items will be priced at $1, $2 and $3.

The company’s transition to a 95% franchised operation, up from 80%, is also nearly complete. Jefferies analysts expect margin expansion into the mid-40% level in 2018.

“We are not early with our favorable assessment given the stock’s 2017 move on improved results and a major sentiment shift to large-cap, asset light models as much of the remainder of the restaurant stocks have lagged and faced significant downward pressures,” the Jefferies note said.

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McDonald’s shares have been on a roll this year as the company continues to execute on a turnaround plan implemented by its British Chief Executive Steve Easterbrook, who has worked to update menus and make restaurants more appealing to tech-savvy, fresh food-loving millennials.

Shares are up 45.5 for the past year, outpacing the 25.6% gain the Dow Jones Industrial Average DJIA, -0.16%  has enjoyed and the 18.9% rise for the S&P 500 index SPX, -0.01%

Wendy’s Co. WEN, -1.95% shares have gained just 18.3% in the period and Restaurant Brands International Inc. QSR, +0.63% Burger King’s parent company, is up 20.6% for the last 12 months.

“The ‘safety’ of McDonald’s has driven valuation well above historical levels, along with many of the other franchisor models which are viewed as predictable cash flow streams with growth and total returns (including dividends and repurchases) well above alternative investment vehicles,” the note said. “Nevertheless, we still see opportunity for the stock to move higher.”

J.P. Morgan analysts published a similarly bullish note on McDonald’s last week, recommending the stock for “income-oriented” investors in 2018.

“McDonald’s is hitting on all cylinders, and confidence in management’s execution of this sustainable turn is increasing,” analysts wrote.

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And: Restaurants find mobile apps are key as more people use delivery service

J.P. Morgan also said quick-service drive-throughs have been stable in an overall sluggish restaurant sector. The latest numbers from The NPD Group show that fast-food burger restaurants and gourmet coffee chains pushed traffic into positive territory, up 1% in the third quarter, for the first time after six consecutive quarters of flat or negative numbers.

J.P. Morgan analysts also note the labor and wage pressures restaurants are feeling.

“To partially offset these pressures, the industry is embarking on many technology initiatives, including mobile ordering and pay, customized loyalty, and delivery to reduce long-term costs and/or increase customer relevance,” the note said.

J.P. Morgan rates McDonald’s shares overweight.

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