McDonald's Investors: Credit Suisse Just Issued A New Neutral Rating

Credit Suisse initiated coverage on McDonald's Corporation MCD Wednesday with a Neutral rating and $99 price target.

Analysts led by Jason West commented that the price target implied a 12x NTM EV/EBITDA which recognized the "stability" of the company's franchised royalty and rent model with an "attractive dividend yield." The analysts also acknowledged the above average capital requirements, "low long-term growth prospects and sluggish near-term trends."

The analysts were "optimistic on potential strategic changes and improved execution under new CEO Steve Easterbrook," however, the stock had already moved higher and made the "the risk-reward somewhat unappealing" with it trading at ~12x NTM EV/EBITDA or approximately 20 percent above the 3-year average.

West listed six reasons why the the current turn-around initiative would be more difficult than the early 2000s:

1. "AUVs starting from a much higher level."
2. The "menu is much more developed" with "MCD generally trimming items, not adding platforms."
3. The "unit growth has not been the major problem this time."
4. "Fast casual now a more viable threat."
5. "Secular headwinds around food consumption more entrenched."
6. There is "less room for cost management given lower SG&A ratios today vs. 2002 and need to invest in consumer-facing tech."

Further demonstrating the company's problem, sales stagnation was clearly attributed to MCD's "company specific missteps" rather than an industry trend.

Source: CS estimates and company data, Consensus Metrix, Technomic.

Looking at EPS, the Credit Suisse earnings forecast for 2015-2016 was approximately 6 percent below consensus. 2015 estimated EPS was $4.76 versus the consensus of $5.02.

The analysts had "a tough time getting to consensus forecasts calling for 4 percent EPS growth in 2015 considering ~40c (8 percent) drag from f/x and ~13c (3 percent) drag from SG&A investments."

West and the analyst team concluded that the stock was "likely to remain range-bound in the near term as continued dismal fundamental trends are partly offset by the stability of MCD's franchise model, a high dividend yield, and optimism around a to-be-announced strategic plan."

McDonald's Corporation recently traded at $96.57, up 0.29 percent.