Credit Suisse Upgraded McDonald's Corporation Stock

McDonald’s Corporation stock trades are in the green today, following an upgrade at Credit Suisse.

Credit Suisse upgraded McDonald’s Corporation stock yesterday, resulting in pre-market gain in the value of the stock. Jason West, an analyst for the sell side firm raised the price target by $12 to a new price target of $112, and updated the stock from Neutral to Outperform.

The analyst cited in the research report that though the Chief Executive Officer of the fast food company has declared various financial and operational steps that McDonald's will take, so the coming period will witness additional improvements. The analyst also said that the checks reflect a progress in the same-store sales in the United States, which has not been accounted for in the analysts’ expectations for McDonald’s stock.

The stock has not performed up to the market standard, as it stayed flat since 2011. While, the analysts expects the present risk reward standing for McDonalds stock looks attractive. The experts expect a 2% to 3% downside and 20% of upside potential.

The analyst provided three main reasons to clarify the upgrade. Firstly, a progress in the sales will be a key driver for the company’s stock upside movement. The fast food company has previously specified that it believes the international same-store sales to become affirmative by the third quarter of fiscal year 2015. Secondly, the company has an upside of 5% to 6% to the forecasts for 2016, driven by higher SG&A, SSS cuts. Lastly, he mentions that if the stock fell from its present price level, it will be supported by the expected dividends stream.

The price target of $112 is computed by using a Direct Cash flow based valuation model, using weighted average cost of capital of 7.5% and an EV/EBITDA multiple of 12 times. The price target implies a multiple of 13 times for the estimated EBITDA for FY16 and a 22 times multiple for the earnings per share estimate for the similar period.

The analysts believe that the price target does not entirely account for the bull-case earnings. He also said that an enhancement in investors’ sentiment is likely, as McDonald's has successfully managed to converse years of downgrade earnings and weak same-store sales. 

McDonald’s stock news shows that the Street is bullish on McDonald’s stock with 20 out of nearly 32 analysts rating the stock as Hold, nine giving a Buy rating and 3 giving it a Sell.

The average price target for the stock is $103.63; reflecting 8% of upside potential from the current closing price.