BoA Analyst Says Investors Should Eat McDonald's

NEW YORK ( TheStreet) -- McDonald's ( MCD) will hold its investors day meeting on Thursday, and even with "modest expectations" for the meeting, this could be a great time for investors to buy the company's shares, according to while Bank of America Merrill Lynch analyst Joseph Buckley.

Shares of the world's largest fast food restaurant chain closed at $97.66 Wednesday. The shares trade for 16.2 times the consensus 2014 earnings estimate of $6.02 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $6.58.

The shares have lagged the market this year, rising 13%, while the Dow Jones Industrial Average has risen 20% and the S&P 500 ( SPX.X) has risen 24%.

"MCD shares are relatively inexpensive trading at a 25%-30% discount to quick service restaurant (QSR) peers on a P/E basis," Buckley wrote in note to clients on Wednesday. He also noted the company's significant quarterly payout of 77 cents a share, which works out to a dividend yield of 3.15%.

McDonald's last week reported its global comparable sales in October were up 0.5% year-over-year, with U.S. growth of just 0.2% and growth in Europe of 0.8%. Meanwhile, comparable sales in the company's Asia/Pacific, Middle East and Africa (APMEA) markets were down 2.88%.

The company said that the October figure for the U.S. was "dampened by comparison against the October 2012 Monopoly promotion and ongoing competitive activity." The APMEA decline was mainly driven by "negative results in Japan."

For the third quarter, McDonald's reported net income of $1.552 billion, or $1.52 a share, increasing from $1.455 billion, or $1.43 a share, a year earlier. Revenue rose 2% year-over-year to $21.013 billion in the third quarter.

Buckley expects the company's comments at the investor day meeting -- the first under CEO Donald Thomson, who took over in July 2012 -- to focus on "basic execution, as opposed to something more dramatically new in strategic direction."

The company is going through its fasted expansion of stores in 10 years, with estimated global united growth of 1,200 restaurants, or 3.5%, this year, however, a "meaningful" further expansion "would likely be poorly received by investors," according to the analyst.

Looking at the numbers provided in Buckley's report, it's clear that he expects significant improvement from 2014 to 2015. The analyst estimates the company's 2013 operating margin will be 31.2% (a fantastic number for almost any business), increasing to 31.6% in 2014 and 32.3% in 2015. He estimates McDonald's will see free cash flow of $4.466 billion this year, increasing to $4.565 billion in 2014 and $5.076 billion in 2015.

McDonald's does not hold excess cash. The company had $2.544 billion in cash and equivalents as of Sept. 30, and said it returned $1.3 billion to investors through dividends and share buybacks during the third quarter. For all of 2013, the company expects to return between $4.5 billion and $5.0 billion to investors.

Factoring in the buybacks and the issuance of new shares to employees through bonuses and/or stock options, the company's share count declined 1% year-over-year to a weighted average of 1.004 billion during the third quarter.

"Over the past several years, MCD's has been one of the best performing QSRs, with positive same store sales driven by multiple factors, including extended hours, new menu items, remodels, and effective marketing," Buckley wrote.

The analyst wrote that the combination of the company's steady returns, the prospects for economic recovery in Europe, a strong competitive position and low expectations for the investor day meeting "may be a good combination" for investors.

Buckley rates McDonald's a "buy," with a $110 price target. He estimates the company's earnings will increase from $5.54 a share this year to $6.00 in 2014 and $6.65 in 2015.

Shares of McDonald's were down slightly in early trading Wednesday, to $97.64.

MCD Chart MCD data by YCharts

Interested in more on McDonald's Corp.? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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