McDonald's China Sale Could Lead To An Attractive Risk-Adjusted Return In 2017

Baird says McDonald's Corporation MCD is transitioning to a higher ROIC business model, and its move to sell the majority of its China business could lead to an attractive risk-adjusted return for the stock in 2017.

McDonald’s agreed to sell its 80 percent stake in its China/Hong Kong operations to CITIC Limited (China state-backed conglomerate), and the Carlyle Group for a total enterprise value of up to $2.08 billion, with McDonald’s receiving roughly $1.5 billion in cash proceeds.

“We estimate that the transaction price values the business at an EV/EBITDA close to 7X (on the incremental EBITDA),” analyst David Tarantino wrote in a note.

Tarantino estimates the China transaction to be slightly dilutive to EBITDA (by 3 percent) and EBIT (by near 1 percent), but roughly neutral to EPS. Importantly, the deal will be “nicely accretive” to company-wide ROIC and ongoing free cash flow.

Tarantino maintains his Outperform rating on the shares, with a target price of $128 that represents a potential upside of 6 percent over the January 9 close.