Here's Why McDonald's Still Has 30% Upside | $MCD

Takeaway: Hedgeye's McDonald's call has been spot on. Our analyst says the stock still has significant room to run.

Over the weekend, Barron’s ran a bullish story on McDonald’s (MCD) highlighting the research of Hedgeye Restaurants analyst Howard Penney. He has been extremely vocal about the fast-food company's company’s turnaround. In fact, just prior to the fast-food chain’s breakout earnings release on October 22, Penney wrote that McDonald’s stock “will never trade below $100 again.” 

Here's Why McDonald's Still Has 30% Upside | $MCD - CHART 1 Cartoon

 

Here are some of the catalysts he highlighted in his recent Fortune piece on McDonald’s, prior to its breakout earnings release on October 22:

  • All Day Breakfast could be a game changer for McDonald’s
  • Management has brought back the value message in its advertising.
  • McDonald’s has a long history of returning value to shareholders.
  • If the company established a REIT it could save billions in taxes.
  • McDonald’s CEO Steve Easterbrook has announced $300 million in cost cutting measures.

It's been a very good call. Shares are currently trading around $113 and are up 19% since Penney's team added the stock to their Best Ideas Long list.

 

Here's Why McDonald's Still Has 30% Upside | $MCD - mcd chart long

 

Despite all this, much of Wall Street continues to miss the upside in MCD. As Barron’s writer Vito Racanelli points out in the story:

 

“Only about a third of the 32 sell-side analysts following the Oak Brook, Ill.-based company rate its stock a Buy. That’s a useful contrarian indicator, but there are other, fundamental reasons to like the stock.”

 

Here’s another key section from the story:

 

“Penney says: “Slow growth temporarily, cut costs, and focus on the four walls.” That’s what McDonald’s has been doing since Steve Easterbrook took over as CEO last March, after years of corporate and stock underperformance. Prior to his arrival, the company had added dozens of new menu items and McCafé coffee offerings, increasing complexity in the back of the house and decreasing throughput.

 

Easterbrook is cutting general and administrative costs, so far to the tune of $300 million, but there’ is more to come, Penney says. McDonald’s will also eliminate about 800 underperforming stores.”

 

We’ll get more clarity on McDonald’s strategy today (particularly about cost cutting measures and the potential the company will create a REIT), as McDonald's management meets with investors in New York City.

 

Here's Why McDonald's Still Has 30% Upside | $MCD - mcd analyst day

 

Bottom line: We added McDonald’s to the long side of Hedgeye’s “Best Ideas List,” in August, when the stock was trading for $99. While the stock is up almost 20% since then, Penney and his team still see 30% upside.