McDonald's Earnings Growth Could Surprise

The Street could be underestimating McDonalds Corp.'s (MCD) earnings growth potential as the storied fast food retailer makes the turn into the second half of the year.

That's the opinion of UBS analyst David Palmer, who reiterated his "buy" rating on the stock and left his $69 price target unchanged.  

In a note to clients, Mr. Palmer said:

While dividend increases will continue to support valuation, we believe return of investment capital gains and earnings per share upside should remain the key stock drivers in the second half of 2008 and beyond.

In particular, the analyst said certain EPS drivers are being underestimated by the consensus, including supply chain changes the company has made and greater general & administrative efficiency. He said McDonalds can also expect sales upside from new European kitchens and the launch of new beverages as the company rolls out iced coffees and teas across the U.S. 

Mr. Palmer raised his second quarter EPS estimate from $0.85 to $0.87 on expectations of better margins and a slightly higher currency in the quarter.  He forecasts June's same store sales growth of 2% in the U.S., 4% in Europe and 4% in Asia Pacific, the Middle East and Africa.

Comments

[algo41:]

Very useful information, especially SS growth in June is expected to be lower than in past months.

2008 Jul 18 08:02 AM

[deaverb:]

Useful and crisp. Impressive to read a short well thought through article without fluff. A little info, especially reminding us about McD getting with the coffee (and tea!) business with iced beverages. As Drucker says, "Small line extensions often bring the largest most predictable rewards." McD continues to impress--sticking with their knitting--and doing it better. I admit--I like their coffee now. I like Starbucks too. But liking McD means less trips to Starbucks.

2008 Jul 18 08:49 AM

[tginomorebush:]

Might be a REAL surprise ......... similar to the beating Yum JUST TOOK!

2008 Jul 18 09:19 AM

[Ham Radio:]

YUM, a great firm, took a beaing because of over-leverage to China. MCD appears to be firing on all cylinders and their outlets are very busy.

2008 Jul 18 02:58 PM