McDonald’s Stock Has Outperformed. Why an Analyst Says That’s a Problem.

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McDonald’s grew same-store sales in its latest quarter, despite a very difficult consumer backdrop.

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The stock market is rallying today, but shares of McDonald ’s are falling despite the company’s strong second-quarter results. That’s likely due in part to a downgrade from Deutsche Bank, which worries the fast food behemoth’s stock might not be the best value in the industry right now.

McDonald’s (ticker: MCD) is off 0.3% to $256.34 in recent trading Wednesday, but has fallen just 4.5% this year, compared with the S&P 500 ’s more than 17% tumble and a double-digit decline for most peers.

For analyst Brian Mullan, that outperformance is understandable, and he stresses he doesn’t “have a negative ‘call’ to make here.” His decision to downgrade the shares to Hold from Buy, and lower his price target by $4 to $259 is more about value. He is “simply expressing a view that there is better relative value in our coverage at present, and we expect outperformance from certain of its limited service peers over the next 12 to 18 months (as measured from here).”

Mullan praised the quarter, particularly the company’s ability to grow same-store sales despite a very difficult consumer backdrop. Management, however, admitted high inflation would likely keep a lid on restaurant margins for the rest of the year, he notes.

Yet he also took his full-year earnings per share estimates lower for 2022 and 2023, albeit modestly, and those tweaks led him to reduce his price target and further solidify his decision to move to the sidelines.

He isn’t alone. Earnings estimates for the third and fourth quarters, as well as 2023 overall, have been edging lower in the past week, according to FactSet.

Still, more than 70% of analysts covering McDonald’s rate it at Buy or the equivalent, and the stock lost its last bear in May. The average analyst price target is $281.29.

Write to Teresa Rivas at teresa.rivas@barrons.com