Is It Time to Go Long on McDonald’s Stock?

McDonald’s (MCD) stock has underperformed the broader markets as well as most of its peers so far this year. MCD stock is up about 9.6% so far this year. In comparison, the benchmark index is up about 25%.

Further, MCD stock is lagging peers in terms of growth. Wendy’s (WEN), Starbucks (SBUX), Chipotle (CMG), Dunkin’ Brands (DNKN), and Shake Shack (SHAK) stock are up 39%, 34%, 91.5%, 18.8%, and 26.8%, respectively.

Notably, McDonald’s stock fell about 7% since the company announced weaker-than-expected third-quarter earnings on October 22. Moreover, the abrupt exit of CEO Steve Easterbrook further pressured its stock.

Factors hurting McDonald’s stock

McDonald’s third-quarter performance failed to impress. MCD missed analysts’ sales estimate. This reflects lower sales in the company-operated restaurants. Also, higher competitive activity in the US took a toll on its top line.

Meanwhile, McDonald’s third-quarter earnings fell short of Wall Street’s estimate. McDonald’s adjusted earnings of $2.11 per share came below Wall Street’s expectation of $2.21.

To add to it woes, McDonald’s board voted CEO Easterbrook out. Easterbrook’s consensual relationship with an employee led to his sudden departure. The sudden executive shakeup made investors and analysts cautious on McDonald’s stock. Market Realist analyst Anirudha Bhagat wrote that the analysts are worried about McDonald’s growth prospects. Piper Jaffray downgraded McDonald’s stock. Meanwhile, Citigroup Inc. and MKM Partners cut their price target on McDonald’s stock.

Notably, Easterbrook is credited with turning around the company. Under his leadership, McDonald’s stock nearly doubled.

What’s in the offing?

We believe MCD stock could trade sideways in the near-term, owing to uncertainty around growth prospects. However, the downside seems limited. The recent pullback in McDonald’s stock reflects the negatives. Also, McDonald’s did disappoint with its third-quarter performance. However, its global comparable sales rose by 5.9% and beat analysts’ estimate of 5.6% growth. We believe McDonald’s digital transformation, store remodeling, menu innovation, and expansion of delivery capabilities could drive its revenues in the coming quarters.

Today, RBC started coverage on McDonald’s stock with an “outperform” rating and target price of $218. The target price reflects an upside of about 12% based on its closing price of $194.68 on December 9.

Meanwhile, the majority of analysts remain upbeat on MCD stock. Roughly 25 analysts suggest buying MCD stock. Meanwhile, ten analysts suggest “hold.” Analysts’ target price of $221.20 reflects an upside potential of 13.4%.