Why Analysts May Now Prefer McDonald’s Over Yum Brands

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According to some analysts, there appears to be a changing of the guard in the fast-food world as McDonald’s Corp. (NYSE: MCD) is taking the place of Yum! Brands Inc. (NYSE: YUM). McDonald’s is sliding into an opportune position and analysts are lovin’ it, while Yum Brands is facing increasing pressure in China.

RBC Capital Markets upgraded McDonald’s to Outperform from Sector Perform with a price target of $115, up from $93. The brokerage firm is expecting potentially 1% growth for February when the results come out next Monday.

It is worth noting that this is the highest analysts’ price target, and it implies an upside of 15% from current prices. Since the end of January, the stock price has made a 12% run to the current price levels. Also McDonald’s current price-to-earnings (P/E) ratio is roughly 20.

It is very possible that the golden arches have turned it around domestically, but be wary of the low bars that were set in the previous year.

Merrill Lynch maintained a Buy rating for McDonald’s and raised its price target to $112 from $101, reflecting higher restaurant group valuations and a greater potential for change under new CEO Steve Easterbrook. The firm notes that its new price target should not be viewed as a sign of near-term bullishness but rather recognition that the new CEO is unlikely to maintain the status quo.

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Unquestionably, Easterbrook’s main focus will be on improving sales, especially domestically where the brand is giving up significant market share to competitors. McDonald’s has a number of competitive advantages that it should be able to use more effectively. These include outstanding real estate, great operational consistency and a marketing fund that is several times larger than any competitor’s.

Merrill Lynch described its investment thesis as:

McDonald’s shares have appeal as a total return vehicle, including a long-established history of annual dividend increases. The company’s competitive position is strong across the globe. Earnings face some near term headwinds, but the stock’s relatively defensive status and 3%-plus yield support are appealing. Change is being implemented in the large U.S. and European markets that has potential to lead to improved sales and earnings.

McDonald’s shares were relatively flat at $99.83 in the first two hours of trading Wednesday. The stock has a consensus analyst price target of $96.88 and a 52-week trading range of $87.62 to $103.78.

To even out this scale, Baird downgraded Yum Brands to Neutral but moved its price target up to $84 from $80, following the strong start that the company has made in 2015. The long-term fundamentals look positive for the stock, but there appears to be elevated risk for the company related to the uncertain timing and trajectory of the China recovery. Yum Brands’ forward P/E ratio is currently 23 for 2015, roughly a 39% premium to the S&P 500 and above the stock’s two-year average of 30%.

Shares were down 1% at $80.59. The consensus price target is $80.56, and the 52-week trading range is $65.81 to $83.58.

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