McDonald's Q2 Earnings: Upside Scenario Likely Needed For Stock To Hold Gains

Analysts at Baird maintained an Outperform rating on McDonald's Corporation MCD's stock with an unchanged $164 price target heading into the restaurant chain's second-quarter earnings report on July 25.

Baird's David Tarantino estimates McDonald's will report 8 percent EPS growth to $1.58, although this is short of the consensus estimate of $1.61. The company is also expected to report a 3.5 percent growth in global comps (versus +3.9 percent consensus estimate) and an EBIT margin growth of 280 basis points.

McDonald's U.S. segment, which accounts for approximately 43 percent of total sales, could show a comp growth of 3.5 percent that's above the consensus estimate of 3.1 percent, the analyst said. This also marks an acceleration from the first quarter's 1.7 percent growth and will be supported by structural improvements at restaurant-level execution, compelling value promotions, and contribution from new initiatives such as delivery and the launch of Signature Crafted line of sandwiches.

Looking beyond the second quarter, the fast food chain has a "range of internal drivers" that will help the company sustain a "healthy comps trajectory" through at least 2018. The problem is this is mostly expected among analysts and investors, which implies that an upside scenario is needed for the stock to hold on to recent gains.

Nevertheless, the one-year out risk-reward profile remains favorable but investors should consider being aggressive only on a pullback and be less aggressive into further strength.

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