On October 22, McDonald's shares came under pressure after posting 3Q19 adjusted earnings of $2.11 per share, up from $2.10 a year earlier but missing consensus by $0.10.
Overall same-store sales rose 6%, above the consensus forecast of 5.4%, reflecting the impact of digital initiatives and increased deliveries.
We look for expanding operating margins given better margins available from refranchised restaurants and lower commodity prices, although increases in the minimum wage in several states will be an offset.
We also expect McDonald's to benefit from the launch of new promotional offers, store renovations, and the increased use of its mobile order-and-pay system.
While dipping after earnings, we note the MCD shares have had good outperformance versus the broad market over the past 1- and 2-year periods.
Our target price of $245 implies a multiple of 27.2-times our 2020 estimate, and a potential total return, including the dividend, of 25% from current levels.
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