Why You Should Buy McDonald's (MCD) On The Dip

Shares of McDonald's (NYSE:MCD) climbed over 1.80% on Monday, just one trading day after a significant downgrade led to a relatively large sell-off and extended the stock’s slump. Even with today’s gains, MCD is down about 15% over the last month and a half.

RBC Capital Market analysts lowered their McDonald's price target to $170 per share from $190 per share on Friday. The analysts also reduced their fiscal 2018 EPS forecast by $0.17 per share, and lowered their first-quarter U.S. same-store sales growth outlook to 1% from 3.5%.

“We significantly lower our US SSS (same-store sales) expectations due to deteriorating industry conditions and a disappointing early sales impact from the $1, $2, $3 value menu," analyst David Palmer wrote in a note to clients.

Despite RBC’s negative short-term outlook, the firm still has long-term faith in the fast-food giant, noting that it believes “the chain has ample opportunities to course correct and re-accelerate SSS growth in the coming quarters.”

Credit Suisse (SIX:CSGN) analysts backed up this positive long-term sentiment on Monday. Analysts reaffirmed their $191 per share McDonald's price target, which represents a roughly 29% upside from Friday's closing price.

Credit Suisse analysts also don’t seem to be reading too much into McDonald’s subdued early first-quarter sales results. The firm compared McDonald’s new low-cost menu with the original Dollar Menu’s initial slow traction.

On top of that, Credit Suisse noted that it believes McDonald’s can deliver solid same-store sales growth this year.

“The last time MCD traded at these valuation levels was in ~late 2016 as investors feared a slowdown in US SSS,” analyst Jason West wrote in a note to clients Monday. “We believe the business is in a much better place than it was a few years ago, so the current correction seems overly punitive if it's due to short-term sales concerns.”

Other Fundamentals

Along with its new $1, $2, $3 value menu, McDonalds has another big plan to boost sales. The restaurant chain’s “Better Chicken” project aims to increase its chicken-related offerings, with a focus on better quality food in order to fend off competition from Chick-fil-A and others.

On the promotional front, McDonald’s announced a new multi-year Happy Meal collaboration with Disney (NYSE:DIS) at the end of February. The deal centers around a commitment to improve nutritional standards and will include toy releases from Pixar, Disney Live Action, Marvel Studios, and Lucasfilm. This new partnership is set to kick off in June with Incredibles 2 promotions.

McDonald’s is also currently a Zacks Rank #2 (Buy), and analyst sentiment has been on the rise recently. McDonald’s has earned significant earnings estimate revisions with 100% agreement to the upside for the company’s current quarter, the following quarter, the current fiscal year, and the following year.

The fast-food power is projected to see its Q1 earnings surge by 14.29%, based on our latest Zacks Consensus Estimate. MCD’s full-year 2018 earnings are expected to surge nearly 15% year-over-year. Looking to fiscal 2019, the company is projected to see its EPS figure hit $8.31 per share, which would mark an additional 8.61% climb over our current 2018 projections.

McDonald’s is also expected to expand its EPS figure at an annualized rate of 9% over the next three to five years, which is strong for a company of its size and age that has been forced to adapt amid changing consumer habits.

Lastly, as the recent Credit Suisse analyst report alluded to, McDonald’s stock price currently sits roughly 18% below its 52-week high, which means now might be a good time to consider buying MCD on the dip.

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