Wednesday, May 20, 2009

McDonald's (NYSE:MCD): Upgraded to Buy at Deutsche Bank

Deutsche Banks is out upgrading McDonald's (NYSE:MCD) to Buy from Hold with a price tgt of $65 (prev. $60).

According to the firm the upgrade is supported by: 1) compelling valuation, 2) positive upcoming catalysts and 3) attractive cash flow. The stock now trades at 13.6x forward 12- months EPS, the lowest multiple since early 2003 and below the 5-yr avg. of 16.0x and the restaurant industry avg. of 16.1x. Further, with the div. yield at an all-time high and the earnings outlook improving, they are moving to a Buy.

Upcoming catalysts
Deutsche analyst sees several upcoming catalysts for MCD that could provide upside to 2H
forecasts and/or improve the valuation multiple. Key catalysts include: 1) McCafe (now in +10k locations vs. 1k a year ago; national advertising launched on May 5th), 2) easing commodity pressures (guidance looks conservative here) and 3) currency overhang likely goes away in 4Q.

Compelling risk-reward

Downside: They see ~$4.00/sh in earnings power in 2010, even under a bearish demand scenario (2% comps), a 50bps decline in rest. margin and no SG&A leverage. Applying a trough multiple of 13x to this outlook puts downside risk in the stock at $52/sh.

Upside: If MCD makes Deutsche's $4.17 est. for next yr. and the multiple returns to historical avg. of 16x, they see upside to $67/sh. Downside = 4%. Upside = 24%. In addition, the firm expects MCD to return nearly 25% of the current market cap to shareholders (via share repurchases and divs.) over the next 3 yrs, providing further downside support.

Notablecalls: MCD is no big mover but I like the call. I feel that over the past months people have been selling the likes of MCD (steady performers) to play the bounces in the high-beta sectors.

Also, it looks like the Quant funds were caught with their pants down in Short high-beta/Long low-beta bets. Many of them have been selling the low beta Longs to fund redemptions, while keeping the high-beta Shorts in place.

The Deutsche call isn't earth shattering but it may create some nice buy interest in this high quality name. Business for MCD has never been better.

PS: One blog I have been reading recently is Zero Hedge ( I know very little about the author(s) but their commentary is certainly interesting. Check it out.

Seeing the amount of work that is put into Zero Hedge makes me almost feel bad about myself. I should write more.

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