Valuation, Rising Rates And Gasoline Costs Will Hurt McDonald's, Wendy's

While there seems to be limited upside to the current valuations of McDonald's Corporation MCD and Wendys Co WEN, the companies could face “more potential macro headwinds as gasoline becomes an incremental household expense after being a benefit for the last two years,” Guggenheim analysts said in a report.

The analysts downgraded the ratings on the companies from Buy to Neutral, while establishing a price target of $127 for McDonald's and removing the price target for Wendy’s.

Rising Rates Add To The Challenges

The unemployment rate was already close to historical lows. While both McDonald’s and Wendy’s had experienced management teams that have been successfully executing restructuring plans, the Guggenheim report pointed out that “the rate of franchise investment in the near term could be challenged in a rising interest environment.”

Both the stocks were trading within 10 percent of their respective fair value price targets, the analysts mentioned, while reiterating their above-consensus estimates for 2017 for each.

The analysts said they preferred casual dining to quick-service brands.

McDonald's closed at $119.27 and was trading down about $0.42 in the pre-market session, while Wendy's closed at $12.57 and was down about $0.08. Year-to-date, McDonald's is up about 1 percent while Wendy's is up more than 16 percent.