Consumer staples may have started the year on a rocky footing, but the recent downturn in stocks — especially high-flying tech names — has seen investors rotate into more defensive trades. Staples is one of only three sectors in the green for the quarter, and the 2% gain is handily above the S&P’s 7.3% drop.
She added the fast food giant to her portfolio because she thinks the company’s restructuring efforts will push the stock to new highs.
“You have a restructuring story. You have a capex reduction story in the next couple of years. You have a margin expansion story as they refranchise…you’re going to see better free cash flow ahead and higher ROIC [return on invested capital],” she said.
She did note that at 23X forward earnings the stock’s valuation is “fairly rich,” but she believes it is somewhat justified since the company provides “better growth versus [other] consumer staples stocks.”
McDonald’s hit an all-time high last Thursday after Morgan Stanley upgraded the stock to overweight. Analyst John Glass also raised his target from $173 to $210 — the highest on the Street according to FactSet estimates. In a note to clients he wrote that investors could buy “McDonald’s of the future today,” and that while “[d]isruption from accelerated US remodeling is obscuring current top-line results…benefits should become visible in ’19 and position MCD well for years to come.”
Like Stephanie Link, Virtus Investment Partners’ Joe Terranova believes the company’s modernization efforts and renewed focus on customer experience will lift the stock to new highs.
“I think the momentum continues into 2019,” he said on Thursday’s “Halftime Report.” “It’s the experience of the future. I think Steve Easterbrook has done a fantastic job rolling out a lot of things like mobile ordering…and renovating a lot of the franchises.”
McDonald’s has handily outperformed the broader market in the past six months — rising 16% through Tuesday’s close compared to the S&P’s 1.7% decline — which means some investors think the stock may have gotten ahead of itself.
HPM Partners’ Jim Lebenthal noted that “it’s a highly competitive industry,” and that investors shouldn’t place too much value on technological advances since many fast food companies are modernizing.
Sarat Sethi, partner at Douglas C. Lane & Associates, echoed this point, arguing that “on a valuation basis, if you’re looking to put capital to work…your money is better served at other companies with cheaper valuation and better growth rate.”
McDonald’s has a $142.7 billion market cap, and yields 2.51%.