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Guggenheim Says McDonald's Is Setting Up Well For 2019, Upgrades Stock To Buy

Jayson Derrick

Investors should consider being buyers of fast food giant McDonald's Corp (NYSE: MCD) given a combination of attractive valuation and expectations for strong momentum in 2019, according to Guggenheim.

The Analyst

Guggenheim's Matthew DiFrisco upgraded McDonald's from Neutral to Buy with a new $200 price target.

The Thesis

Shares of McDonald's are trading near 15.6 times Guggenheim's EV/2018 EBITDA estimate, which is a 33-percent discount to Domino's Pizza, Inc. (NYSE: DPZ) and a 21-percent discount to Yum! Brands, Inc. (NYSE: YUM), DiFrisco said in the note.

This "unjustifiable" valuation gap to its peers has existed for the past five years at a time when it was a lower franchise mixed company,. McDonald's is on track to hit its long-term 95 percent franchise mix target, which would be in line with both Domino's and Yum Brands.

Meanwhile, McDonald's management continues to deploy its "Experience of the Future" (EOTF) technological overhaul, which the analyst said is found at around one-third of stores globally.

As part of the modernization effort, the company should see continued incremental customer visits and higher average checks. Assuming a full EOTF implementation in the future, global sales lifts should be in the mid-single digit range and U.S. same-store sales should become a net tailwind in the first half of 2019.

Price Action

Shares of McDonald's traded around $170.87 at time of publication.

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Latest Ratings for MCD

Date Firm Action From To
Oct 2018 Guggenheim Upgrades Neutral Buy
Oct 2018 KeyBanc Initiates Coverage On Overweight
Aug 2018 Citigroup Maintains Neutral Neutral

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