Baird Describes Brexit Implications For McDonald's

McDonald's Corporation MCD has significant exposure to Europe, with the region contributing about 40 percent of total operating income, with the UK alone represents nearly 10 percent, Baird’s David E. Tarantino said in a report. The analyst added that McDonald's also faces other headwinds in the form of softer US comp trends and the recent currency movements.

Despite these headwinds, the risk/reward balance has begun appearing “more appealing,” following the recent pullback in shares, analyst David Tarantino noted. He added that McDonald's stable earnings model and attractive dividend yield of 3.0 percent should limit further downside in the near term.

Related Link: These Restaurant Stocks Could Benefit From Their U.S. Focus Post-Brexit

Brexit Implications

“Although the potential impacts of Brexit are difficult to predict at this stage, MCD is now facing greater headwinds from currency translation (with the U.S. Dollar strengthening considerably vs. the British Sterling in recent days) and seems at risk of experiencing a slowdown in top-line trends due to economic uncertainty in the region,” the analyst wrote.

Despite these facts, McDonald's does have a highly franchised business, which should help offset the earnings impact from any softness in Europe.

Tarantino maintained a Neutral rating on the company, while reducing the price target from $130 to $126.