RBC's 3 Restaurant Picks For 2017
In a note released on Thursday, RBC Capital Markets, said McDonald's Corporation (NYSE: MCD), Panera Bread Co (NASDAQ: PNRA) and Starbucks Corporation (NASDAQ: SBUX) are its top Outperform rated names heading into 2017.
Co-Specific Initiatives, Industry Trends, Tax And Valuation
Analyst Zachary Schwartzman attributed his view to the combination of company-specific initiatives in the areas of food renovation, digital and value that should drive improving sales by mid-2017, potential benefit of improving retail/restaurant industry, reasonable valuation levels and potential benefits from corporate tax changes.
That said, RBC Capital Markets believes there may be better potential upside in names such as Chipotle Mexican Grill, Inc. (NYSE: CMG) and Texas Roadhouse Inc (NASDAQ: TXRH), if tax changes approach the levels of its upside scenario.
The firm noted that its upside scenarios include significant earnings and price target increases for two reasons, namely a roughly 2-point boost to industry demand by 2018 from income tax reduction and further earnings per share increase due to corporate tax reductions. RBC referred to the 2.5-basis-point-consumption boost, its U.S. economist Tom Porcelli foresees from the positive impact of estimated tax changes to disposable personal income.
According to the firm, adjustments to the U.S. federal tax rate to 20 percent from 35 percent, offsetting removal of deductions such as interest cost and FICA tip credits and addition of a capital expenditure deduction were used to calculate the estimated tax changes. The firm expects the tax changes and stronger industry demand to boost earnings per share by an average of 20 basis points by 2018 and create an average stock upside of 30 percent from current levels.
5 Predictions
RBC also made five predictions for investors in restaurant stocks:
The firm also raised its price targets and valuation multiples on those companies in its coverage universe that are most likely to be impacted by corporate tax reform and fiscal policy.
Ratings/Price Targets
McDonald's: Outperform/$145 price target.
Panera Bread: Outperform/$250 price target.
Starbucks: Outperform/$66 price target.
Latest Ratings for MCD
Dec 2016 | Nomura | Upgrades | Neutral | Buy |
Dec 2016 | Guggenheim | Downgrades | Buy | Neutral |
Oct 2016 | Nomura | Maintains | Neutral |
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