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Value Menu Flop Has Traders Gobbling Up McDonald's on the Cheap

Published 03/15/2018, 03:20 PM
Updated 03/15/2018, 04:01 PM
© Reuters.  Value Menu Flop Has Traders Gobbling Up McDonald's on the Cheap

(Bloomberg) -- Call it the March McComeback.

McDonald’s Corp. shares have recovered all of their losses and then some since a selloff triggered by a more pessimistic sales outlook from RBC Capital. The shares fell 4.8 percent on March 2, the biggest one-day slump in eight years, as analyst David Palmer cut his comparable sales estimates, citing a disappointing consumer response to the latest $1 $2 $3 value promotion. They have risen every day since then, regaining about 9 percent.

The rebound, which has beaten the S&P 15 Restaurant Index’s 5 percent gain during the same period, comes as some analysts speak out in defense of the stock.

Andrew Strelzik at BMO Capital Markets told clients this week that the recent selloff offers “an opportunity to capitalize on overreaction to likely temporary issues,” as sales weakness is expected to be short-lived. He rates McDonald’s outperform and has a $190 price target.

Bernstein’s Sara Senatore also defended the burger chain, blaming any potential soft start to the year “as a function of MCD’s determination not to lap last year’s aggressive local value promotions with equally compelling offers, and therefore something that could be course-corrected should the company so choose.” She rates the stock outperform with a $195 price target.

Even Palmer, who maintained his outperform rating when he lowered his sales forecast earlier this month, had some positive things to say after the company’s presentation at a BofAML conference Wednesday, telling clients in a note that he’s hearing of “significantly improving sales trends in March in several areas of the country.”

Palmer, whose $170 price target for the shares is among the lowest, also viewed positively the company’s introduction of a breakfast value menu, 2 for $4 any breakfast sandwich nationally, and said he believes premium items could be a “potential win” for McDonald’s in the second quarter.

In all, McDonald’s has 23 buy ratings, 12 holds and no sell recommendations. The average price target of $188 implies a 17 percent gain over the next 12 months, according to data compiled by Bloomberg.

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