Can McDonald's Outperform The Market?

In a report published Wednesday, Cowen and Company analyst Andrew M. Charles initiated coverage of

with a Market Perform rating and a price target of $100. "New mgmt is in place with a priority to turn U.S. sales, which have been soft over the last 2.5 years. The company has started to lay the foundation for improvement but we believe given the company's large size and highly fragmented base of franchisees, along with heightened competition from QSR [Quick Service Restaurants] peers as well as fast casual, the road to recovery will be challenging," Charles wrote. Cowen's proprietary survey of 2,500 consumers proportionate indicates that 28 percent of fast casual visits "come at the expense of a QSR visit" as compared to 46 percent from casual dining and 26 percent from another fast casual restaurant. The fast casual category continues to expand rapidly and robust job growth continues to boost the macro environment. Against this backdrop, the analysts expect fast casual to continue to challenge the company's turnaround as consumers "trade up." Charles identified the "most appealing attribute" of McDonald's shares as "financial flexibility" with the opportunity to grow cash and repurchase stock. "MCD is currently selling 1,500 stores to franchisees to reach an 85% franchise mix, but we believe there is an opportunity to sell more stores beyond stated targets to reach an 87.5%-90% franchise mix," the report mentioned. This could result in $0.09- $0.12 of annual SG&A savings as well as a more "defensive, predictable business model" with lower capex levels and the "ability to support higher levels of debt." McDonald's shares are currently trading at a 35 percent discount to its QSR peers. With this, the company's stock is trading similar to large cap consumer staples, which "we believe to be a better representative set of comparable stocks given the similar investment profile of lower profit growth, higher global exposure and dividend yields closer to MCD," Charles explained.