Bernstein: McDonald's Won't Need To Further Cut Expenses To Maintain Turnaround Momentum

Shortly after McDonald’s Corporation (NYSE: MCD) announced its earnings beat, Bernstein reevaluated its analysis on the fast-food restaurant.

The firm expressed its belief that McDonald's may not need to slash its expenses to keep its momentum on its turnaround plan. The firm stated that the company is focusing on the real estate model and co-investments with franchisees.

Analyst Sara Senatore and Stephanie Ng see McDonald’s move as a long-term opportunity. At the same time, the analysts pointed out that the company is spending higher general and administration and CAPEX than rivals as a percentage of system sales. While indicating that this could be due to structural issues partly, the analysts do not expect any cuts in the G&A costs in the near term.

In a research note, the brokerage stated, “Over time MCD can grow in-line with the QSR industry (~3 percent) suggesting an earnings algorithm of ~MSD topline and ~10 percent EPS growth is reasonable but not conservative. MCD needs 2–3 percent comps to leverage expenses in a normal environment.”

Bernstein sees the momentum behind the latest turnaround has vanished pointing out the earlier comps of an average 5 percent growth after the second quarter of 2003.

The brokerage views McDonald’s issue is that it provides less value compared “to FAFH and FAH.” This is partly due to softer comps reflecting the market conditions that remain challenged. The firm said industry traffic was about 1 percent or below and remained flat for the current year-to-date period. The analyst blamed deflation for this. Pricing, which was below FAFH before 2012, is now above FAFH for McDonald's.

The brokerage has a Market Perform rating with a target price of $129 on the stock.

At last check, the stock had shed 0.20 percent on the day to $112.35.