McDonald's shares get an upgrade by Morgan Stanley but is that a reason to buy its shares?
Morgan Stanley is shaking things up in the restaurant world.
The company's analysts John Glass, Jake Bartlett, and Courtney O'Brien changed their ratings on three companies, upgrading McDonald's to "overweight" while downgrading Yum! Brands to "equalweight" and Buffalo Wild Wings to "underweight".
CNBC contributor Gina Sanchez, founder of Chantico Global, agrees with Morgan Stanley's call on McDonald's relative to Yum! Brands and Buffalo Wild Wings.
"McDonald's is clearly the cheapest of all of them at 17.3 times forward earnings," says Sanchez. "Yum is sitting at around 26 times. Buffalo Wild Wings is at about 39 times forward P/E (price-to-earnings)."
According to Sanchez, McDonald's is trying to invent itself to reflect the changing consumer.
"McDonald's has been suffering," says Sanchez. "They're seen as a low-quality, cheap kind of food and today's younger consumers want something that's higher quality. We've seen a move to see them take the lead on this beef sustainability issue. I think they're really trying to remold their brand."
Sanchez is referring to the company's recent announcement that they are going to begin purchasing "sustainable" beef by 2016, though they aren't committing to being 100% sustainable.
But it's not so much the McDonald's environmental policy as it is their dividend policy that makes the stock an attractive buy, according to Sanchez.
"Mickey D's you buy because it has a great dividend payout," says Sanchez. "It has good revenues relative to the industry. It has widening margins: gross operating margins around 45%, net margins at 20%. Those are great numbers."
CNBC contributor Andrew Busch, editor and publisher of The Busch Update, says Morgan Stanley's upgrade of McDonald's relative to its peers follows a well-known strategy.
"Clearly, what Morgan Stanley did is follow the 'Dogs of the Dow' Theory, which is today's losers are tomorrow's winners," says Busch.
With that in mind, Busch gives a trading strategy he thinks would work given McDonald's relative valuation to its peers.
"I think Buffalo Wild Wings is completely out of control at being up 500% over the last five years," says Busch. "I wouldn't mind shorting Buffalo Wild Wings and buying McDonald's. That's a way to trade it and not really care whether the overall stock market is going up or down. "
To see more analysis of McDonald's by Sanchez and Busch – and what rising interest rates could do to McDonald's stock – watch the video above.
More from Talking Numbers:
- Consumer Discretionary
- Investment & Company Information
- Morgan Stanley
- Buffalo Wild Wings