As of March 9, 2018, McDonald’s (MCD) was trading at $157.24. On the same day, analysts were expecting the company’s stock price to reach $187.11 in the next 12 months, which represents a return potential of 19.0%.
The fear of customers opting for cheaper menu options with the introduction of McDonald’s new $1 $2 $3 Dollar Menu appears to have prompted analysts to lower their target price. On March 6, 2018, Credit Suisse lowered its target price from $191 to $175, and on March 2, RBC lowered its target price from $190 to $170. Peers’ target prices and return potential are as follows:
Of the 34 analysts following McDonald’s, 70.6% recommend “buy” and 29.4% recommend “hold.” None recommend “sell.” McDonald’s stock price moves in tandem with analysts’ estimates. When analysts raise their target price, the company’s stock price moves up, and vice versa. While McDonald’s is currently trading below analysts’ 12-month target price, this does not mean an automatic “buy.” Investors are advised to analyze analysts’ estimates, as discussed this series, before making any investment decisions.
Due to its high visibility in McDonald’s earnings, we have opted for the forward PE (price-to-earnings) multiple to assess its valuation. As of March 9, 2018, McDonald’s was trading at a forward PE multiple of 20.4x. On the same day, peers Wendy’s (WEN), Jack in the Box (JACK), and Restaurant Brands International (QSR) had multiples of 30.5x, 18.6x, and 21.4x, respectively.