Traders Play Defense With McDonald's, Offense With Panera
BTIG said quick service is more defensive given the highly franchised nature of the business, wider geographic footprint, more modest sensitivity to same-store sales and consistently high capital returns. Additionally, quick service is generally more insulated during economic downturns as consumers trade down from more expensive restaurant categories.
The brokerage, which has a Buy rating and $130 price target on McDonald's, is recommending McDonald's for investors searching for a safe bet, given the company's global scale, improving sales trends, increasing franchise mix and aggressive share repurchase.
While still early in the turnaround, McDonald's has seen an improvement in its U.S. sales trends and appears to be regaining some of its lost market share. In the fourth quarter, U.S. same-store sales increased 5.7 percent, the best quarterly figure since the first quarter of 2012, driven by the launch of All Day Breakfast in October.
"We believe this reversal in market share is sustainable as McDonald's continues its menu innovation and improves its digital offering," analyst Peter Saleh said in a client note.
The Offensive Play
If investors assume the current environment is temporary and economic fundamentals continue to improve, then BTIG recommends Panera Bread as its technology initiatives are beginning to meaningfully drive sales and its earnings outlook is improving.
"We believe that after two years of earnings pressure from the company's investment in technology initiatives (Panera 2.0), results are now starting to materialize," Saleh said.
Panera 2.0 is expected to be a compelling sales driver as it is beginning to meaningfully drive sales results and the higher digital sales mix resulting from the initiative should drive greater customer satisfaction and frequency. Saleh has a Buy rating and $215 price target on Panera stock.
Other Stocks To Consider
On the capital returns front, Saleh said the most significant names are Brinker International, Inc. (NYSE: EAT), Domino's Pizza, Inc. (NYSE: DPZ), McDonald's and Yum! Brands, Inc. (NYSE: YUM), with the latter two in the middle of significant repurchase activity as part of their recapitalization plans.
McDonald's plans to return about $14 billion to shareholders this year, while Yum! Brands expect to return about $6.0 billion ahead of the separation of its China division. Domino's is completing an accelerated repurchase program for about 10 percent of its market cap.
Shares of McDonald's and Panera were up 25 percent and 30 percent, respectively, in the last one year. The broader S&P 500 index was down 9 percent in the same period.
Latest Ratings for DPZ
|Oct 2016||BTIG Research||Maintains||Buy|
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