From Turnaround To Growth, McDonald's Remains A Top Name In Its Category

Reaffirming McDonald's Corporation (NYSE: MCD) as one of the top Outperform names for 2017, RBC Capital’s David Palmer stated that the company was expected to see improving market share in the United States, while its long-term growth algorithm has been rapidly coming into focus, which is “very attractive,” relative to its restaurant and large-cap staples peers.

The analyst maintains an Outperform rating on the company, with a price target of $45.

Long-Term Growth

“A credible long-term growth and strong free cash flow story is coming into focus as it completes its refranchising program, upgrades its asset base, and right-sizes its cost structure to be more in line with that of highly franchised peers,” Palmer explained.

Once completed, the analyst believes these initiatives have the potential to drive 100-percent free cash flow conversion, along with high single-digit EPS growth and low double-digit total shareholder return over the long term.

Related Link: McDonald's Unveils New Global Growth Plan

With McDonald’s capital expenditure expected to fall from $1.7 billion in 2017 to $1.2 billion within the next five years and with the franchised mix nearing 95 percent, Palmer expects investors to finally become aware of the full free cash flow potential of the company’s business model.

“We see upside to the company’s mid-40 percent EBIT margin target as the company leverages its stable royalty and rental income streams and our model suggests $22 billion–$24 billion in capital returned to shareholders by 2019 is achievable with little change to current leverage ratios,” the analyst went on to say.

Turnaround To Growth

In addition, McDonald’s believes that its U.S. business is in the process of transitioning from a turnaround to a growth mode. Palmer expects the U.S. market share trends for the company to improve in 2017.

The three key reasons for this include “1) higher franchisee unity behind a marketing [...] and reimaging plan, 2) a national value platform to arrest traffic share losses, and 3) increasing accountability to restaurant execution,” the analyst added.