McDonald's Gain Is Wendy's Loss, Analyst Says - TheStreet

McDonald's Gain Is Wendy's Loss, Analyst Says

CIBC raises McDonald's to outperform, saying its turnaround story is believable.
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Less than a year after

McDonald's

(MCD) - Get Report

announced its first-ever quarterly loss, a Wall Street analyst is betting on the hamburger chain over one of its most stable competitors.

On Thursday, John Glass of CIBC World Markets upgraded McDonald's to sector outperform from sector perform, and simultaneously downgraded

Wendy's

(WEN) - Get Report

to sector perform from sector outperform.

"Our upgrade/downgrade pairing is more than coincident; we are suggesting that the expected continued success at McDonald's will make it more challenging for Wendy's to reverse its current declining sales trends," said Glass, in a research note.

CIBC has had an investment banking relationship with Wendy's in the last 12 months but not with McDonald's.

The rating change came as Glass lowered his rating on the restaurant sector to market weight from overweight, citing a combination of slowing relative earnings growth to the

S&P 500

, rising commodity costs, as well as profit-taking and rotation in the second half of the year.

However, the analyst said that "turnaround stories" will be among the few outperforming areas in restaurants near term. He added that "in the slow-growing U.S. hamburger market, there is room for one turnaround story at a time in our opinion, and this time, it is McDonald's turn."

Glass raised his McDonald's 2004 earnings estimate to $1.50 a share from $1.40 and lifted his price target to $29 from $25. "The breadth of recent U.S. comparable sales trends and improving European margins despite a sales acceleration give us more conviction on the expected earnings recovery," he said.

Meanwhile, the analyst lowered his 2003 earnings estimate on Wendy's to $1.94 from $1.96. He also cut his 2004 EPS estimate to $2.20 from $2.29 and lowered his price target to $31 from $37.

"Despite easy comparisons and a relatively inexpensive valuation, we believe that McDonald's U.S. recovery will undermine a near-term pickup in sales at Wendy's as the quick-service restaurant hamburger segment has generally been a zero-sum game," Glass said.

In Wendy's defense, Glass noted: "There's still no disputing that it is the best-run quick-service restaurant operator, and we are not abandoning the stock. But we are suggesting the second half may be more lackluster than many assume due to the recent rapid changes within the competitive environment."

McDonald's was up 48 cents, or 2%, to $22.87, while Wendy's was down 22 cents, or 0.8%, to $28.48.