Why Is Stephens Still Overweight McDonald's?

McDonald's Corporation MCD has had a positive year thus far, up more than 4 percent.

While the valuation for the stock remains strong, and recent historical data imply the issue is performing well, analysts at Stephens recently reiterated an Overweight rating on McDonald's.

The analysts explained, "[T]he stock will likely be tied to continued strong comp performance and a recovering margin story, which involves a refranchising initiative and associated cost reductions. As such, we continue to believe that MCD can work higher and would stress that our franchisee conversations have turned significantly more positive over the past 6 months and remain so through mid-March."

Overweight Reiteration And Lowered Price Target To $130

The analysts highlighted five key points supporting their rating and price target decrease.

• 1. Estimates: The firm maintains its first-quarter domestic same-store sales growth estimate at +3.5 percent and an EPS estimate at $1.14. The 2016 fiscal year domestic SSS growth therefore comes in at +2.8 percent and the FY16 EPS estimate at $5.42.

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• 2. Flexibility: "Nimbleness, willingness to change helping MCD performance," the analysts summarized. "We believe MCD had a somewhat sluggish start in the year relative to 4Q." However, the analysts then credited the company for handling "unsuccessful" endeavors such as the "McPick" 2 for $2 campaign with finesse and "nimbleness that we hadn't seen from MCD in the recent past, which we applaud."
• 3. February And March Improvement Likely: Due in large part to the highly successful All-Day Breakfast campaign, the analysts expect to see material improvement for the company over February and March. Additionally, the analysts were "encouraged to hear franchisee optimism around current offerings, the responsiveness of corporate, and what most perceive to be building momentum within the MCD brand as the Company more actively seeks to deliver what its customer is craving."
• 4. Valuation: "[W]e believe there is much less room for error at these valuation levels (currently trading around 22x '16 EPS) and would therefore expect the stock to become more volatile around smaller misses or beats on the top line vs. historical quarters."
• 5. "Brand Buzz": Lastly, the analysts commended McDonald's for its "positive ‘brand buzz,'" stating, "In an industry where momentum often begets momentum, it seems that the guests gained from the All Day Breakfast launch and operational enhancements are looking for a reason to return. In fact, we have heard franchisees and industry contacts praising MCD for focusing its efforts on offering compelling products and price points that their customers want, as well as maximizing profitability for their franchisees […] Therefore, while it's difficult to quantify, we believe the refocusing of the brand toward its customers' needs has meaningfully improved positive brand ‘buzz' around MCD and should continue to contribute to improving results."