McDonald's stock could turn cold, analyst explains
McDonald's stock could go as stale in the near term, one long-time restaurant analyst warns.
On Tuesday, Citi analyst Jon Tower placed a "90-day negative catalyst watch" on shares of the Golden Arches.
Tower's assessment comes as the Dow Jones Industrial Average component has been a relative safe-haven: $MCD shares are up slightly in the last 6 months compared to a 16% drop in the Dow.
The relative outperformance suggests investors stick with McDonald's for its steady dividend (yield: 2.3%) and the view that consumers will trade down to cheaper food in a recession. McDonald's also won high marks on the Street for solid sales trends in the first half of the year.
But that vibe may change, according to Tower.
Here are the details behind the analyst's call:
Price Target: $246 (lowered from $275)
Rating: Neutral (reiterated; 90-day negative catalyst watch)
Stock price movement assumed: Virtually none
Tower goes short-term negative on McDonald's stock for a host of reasons.
"We see increasingly less favorable risk-reward in McDonald's shares, with FX and macroeconomic challenges in Europe looming over EPS estimates heading into 3Q/the winter months, and a valuation (EV/EBITDA near all-time highs vs the market) leaving little room for shares to absorb negative estimate revisions."
Europe's economic slowdown is an increasing source of risk for McDonald's.
"Inflation in key European markets has ramped rapidly and is now taking a low-double digit bite out of discretionary spending power (compared to a mid-single digit to high-single digit hit in the U.S.), with less of an offset from employment growth. Risks mount into the winter, with greater energy usage/potential knock-on effects of energy prices."
The U.S. can't carry all the weight for McDonald's.
"We understand (and agree with) expectations for continued U.S. strength; however, we estimate the U.S. business would need mid-single-digit same-store sales upside on top of existing expectations to offset the profit impact from: (1) dollar strength since 2Q earnings, and (2) even a low-single-digit hit to aggregate Europe same-store sales. Conversations suggest investors are sharpening pencils on both topics, and we expect risks to become better priced in: (1) during the approach to/aftermath of 3Q results, (2) as the focus shifts to 2023."
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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