Tuesday, January 19, 2010

McDonald's Corp (MCD) UPGRADE RATING Upgrade to Outperform: Value for 2010

McDonald's Corp (MCD)
Upgrade to Outperform: Value for 2010

Upgrading MCD to Outperform, raising target price to $71 from $69: We
see several potential drivers of estimate increases, particularly in its more
opaque international businesses, and believe sentiment will improve with the
corresponding upside in headline metrics. Our F10 EPS est. rises to $4.47
from $4.46 and our F11 EPS est. to $4.88 from $4.86.

Investment Case: We do not believe estimates or valuation fairly reflect
MCD’s ability to build upon already substantial 2008/2009 share gains
through a several-year recovery period. It will be long (unemployment
expected to remain above pre-recession levels beyond 2012), uneven, and
slow, and we believe MCD will benefit from its unique ability to
simultaneously appeal to both “depressed” and “recovering” consumers.
Value and investments in other product platforms and assets are not
mutually exclusive, and an unparalleled ad budget can saturate consumers
with multiple messages.

Catalysts: MCD will report Dec. comps and 4Q09 results on Jan. 22.

Valuation: Our DCF-supported $71 price target is based on a 15x multiple
applied to our NTM, 12 mo. from now, EPS est. of $4.78, still a 100bps
discount to other consumer multinationals. Alternatively, this represents a
<9.0x EV/EBITDA multiple on our F11 EPS est., which is also a slight
discount to a peer group



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