McDonald's ( MCD) shares rose Monday after a Wall Street analyst argued its strong new product lineup made the stock a buy in 2005. With its new entree-sized fruit and yogurt salad, upgraded coffee offerings and a new premium chicken sandwich, CIBC World Markets analyst John Glass upgraded McDonald's. Glass said the new product mix should combine with a favorable economic outlook and valuation to boost the fast food giant's stock price this year. Its shares were recently up 41 cents, or 1.3%, to $31.66. "We have sampled
the new chicken sandwich in a test market (Miami) and found it to be one of the best fast food sandwiches we've had," Glass said in a research note out Monday. "We may be biased, but we think this is one of the best new sandwiches McDonald's has launched in the recent past." While the company posted a comparable sales gain of 9.6% for its U.S. restaurants in 2004, Glass said the new products should support another "decent year of comps." In Europe, Glass sees some new product launches and management changes boding well for a sales rebound in a market in which investors' expectations are "currently low." Furthermore, McDonald's should benefit from a falling dollar. From a financial perspective, Glass foresees favorable free cash flow growth compared to capital expenditures. While he thinks the company will be unable to match its 38% increase in dividends in 2004 due to debt repayments, payments to shareholders could ramp up again in 2006 when its debt payments are completed. Trading at 15.2 times its 2005 estimates, McDonald's is cheap compared to Yum! Brands ( YUM), at 17.3 times estimates, and Wendy's ( WEN), at 15.7 times estimates. "In part, we attribute the disconnect to tougher comparisons and a lower earnings growth rate than that of its peers," Glass said. "We argue that on the flip side, McDonald's offers stability and yield, and that estimates are likely to rise, albeit at a slower rate than in the past."
Shares of Wendy's were recently down 40 cents, or 1.1%, to $37.35, after Glass downgraded it, citing pressure from McDonald's product rollouts. Yum! Brands was down 4 cents, or 0.1%, to $45.48. Glass reports no position in shares of any of the companies mentioned above, but CIBC does have banking relationships with McDonald's and Yum! Brands. McDonald's will report fourth-quarter and full-year results on Friday, and the company is expected to elaborate on its outlook for 2005.