McDonald's Historically High Valuation The Cause For Canaccord's Hold Rating

Canaccord Genuity’s Lynne Collier expressed concern regarding McDonald's Corporation MCD shares trading at a premium to their historical average, especially given expectations of a slowdown in same store sales in H2:16, as compared to H1:16.

Collier initiated coverage of the company with a Hold rating and price target of $122.

“Management has accomplished an impressive turnaround over the last year, which we believe is virtually unprecedented in the restaurant industry,” the analyst mentioned.

Hurdles To Turnaround

However, McDonald’s reported a meaningful slowdown in U.S. same-store sales in Q2 as compared to Q1, a trend that is likely to persist through the remainder of the year, given the tough year-on-year laps and the slowing QSR sales environment.

Collier also pointed out that the energy tailwind has been waning and was likely to come to an end in 2017.

Related Link: McDonald's China Restaurant Sale Process: Have Investors Sold The Rumor?

Growth Initiatives

“Last May, MCD announced its plans to change the global brand into a ‘modern, progressive burger’ company, which included: (1) restructuring leadership and reporting segments, and (2) changes to advertising/promotions and operations, including ingredients and processes,” the analyst stated.

Since that time, the company has seen an improvement in comp trends, which turned positive globally over the past four quarters.

Hurdles Ahead

However, the industry slowdown and difficult hurdles ahead are likely to impact turnaround progress in the United States.

“While sales trends have improved since the start of the turnaround, we note that comparisons in 2H16 and into 2017 become increasingly difficult. Further, given the recent slowdown in U.S. QSR industry sales, we expect the sequential deceleration to continue, including an expected SSS decline in the U.S.,” the analyst cautioned.

Full ratings data available on Benzinga Pro.