Tuesday, December 05, 2006

Calls of Note Part 2

- JP Morgan notes that after meeting with MCD management (CEO Jim Skinner, COO Ralph Alvarez, and UK President Steve Easterbrook) today, McDonalds (NYSE:MCD) remains their top large cap pick. Firm is encouraged by a combination of mid single digit operating income growth in addition to a sustainable 5%+ FCF yield on F07 estimates, and opportunity for EPS upside from solid comps and margins, favorable FX exposure, and the developmental licensee (DL) program.

The European business (35% of operating income) has improved with solid results in France
and Germany, partially offset by a still volatile, though generally improving UK market. JPM is encouraged by longer-term initiatives such as a new bridge operating platform (to be rolled out late F08), and a simplified global POS system. Cashless payment (by mid F07), continued refranchising (38% in F05 going to 46% in F06) and a focus on premium products should help sales, margins, and returns in the UK market. In addition, favorable currency (they now model the Euro at $1.30) allows the firm to raise their F07 estimate by $0.02 to $2.59 (consensus $2.56).

The company plans to sell 2,300 stores to Int'l licensees with a current asset value of $2.2
billion (about 4% of total equity value). As the timing of the DL remains uncertain on a quarterly basis, both the accretion to operating income and reduction in share count represents potential upside to current expectations.

They rate MCD Overweight. JPM believes the stock will at least maintain its current valuation at 16.4x F07E EPS and will be supported by 6-7% long-term operating income growth, a solid 5.3% cash flow yield, and strong performance in both the U.S. and Europe.

Notablecalls: MCD staged a nice breakout yesterday and I suspect this one may have some legs.

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