Change is coming in the world’s largest hamburger chain since it\’s new leader, Steve Easterbrook, labels himself an “internal activist.” This has produced some optimism among investors, with?McDonald’s Corp.’s fill up 6% in the past little while.
With new strategic thinkers at?McDonald’s helm, RBC Capital Markets analyst David Palmer thinks the pace of change could be accelerated. He upgraded the organization to outperform from sector perform on Wednesday and hiked his price target to US$115 from US$93.
Mr. Palmer anticipates that same-store sales and return on invested capital will turn positive by the end of 2015, followed by more development in 2016. This improvement is expected to come from a turnaround in the company’s U.S. division, a stabilization of international trouble spots and refranchising.
“We believe improved industry growth, no more crises in Japan, China and Russia, and much more stable FX can help put an end to downward EPS revisions,” the analyst told clients.
For the U.S. division in particular, which accounts for roughly 40% of profits, Mr. Palmer highlighted the need for better food quality and marketing transparency, a rationalization from the menu, increased menu regionalization, core protein upgrades, a broadening of customization in areas like the ‘Create Your Taste’ format, and the launch of digital payments.
McDonald’s clearly offers quite a bit on its plate, but investors should be further comforted by its valuation because it trades in a significant discount to its peers within the franchised restaurant space.
Mr. Palmer also noted that?McDonald’s faces fewer structural headwinds than other large consumer brands, that have core product perception issues that are difficult to escape. Although the company has encountered quality concerns, he believes it will likely be able to upgrade its core product and more easily shift to mass personalized marketing through digital engagement.