McDonald's Downgraded As U.S. Restaurant Trends Seen Slowing

Research firm Nomura downgraded McDonald's (MCD) to Neutral from Buy, citing weak sector sales and tough upcoming comps for the fast food giant.

WHAT'S NEW: U.S. restaurants' same-store sales have slowed this quarter and may "remain sluggish" for the rest of 2016, according to Nomura analyst Mark Kalinowski. The burger space is performing even worse than the restaurant sector as a whole, as its same-store sales look poised to rise by less than 1% this quarter versus the same period a year earlier, the analyst stated. Meanwhile, McDonald's, along with the entire restaurant sector, is facing moderately tougher comparisons in Q3 and much more difficult comparisons in Q4, the analyst wrote. Contending that McDonald's is finding it increasingly difficult to increase its same-store sales in the U.S. this quarter, Kalinowski lowered his Q2 same-store sales estimate for the company to 2.4% from 3%. Kalinowski wrote that he now has the lowest U.S. Q2 same-store sales outlook for McDonald's among sell-side analysts. The analyst lowered his price target on the shares to $129 from $142.

WHAT'S NOTABLE: Kalinowski also downgraded his rating on McDonald's competitor Wendy's (WEN) to Neutral from Buy. The analyst believes that Wendy's, like McDonald's, is being hurt by weakening U.S. restaurant trends this quarter and will be undermined by tougher comparisons in the second half of the year. He lowered his price target on the shares to $11 from $12.50. Kalinowski also downgraded Papa John's (PZZA) and Domino's Pizza (DPZ), each to Neutral from Buy. In addition to slowing U.S. restaurant trends, the analyst cited the possibility of increased competition from Yum! Brands' (YUM) Pizza Hut, valuation, and "the possibility of growing risks associated with driver accidents/insurance" as reasons for the downgrade. He kept a $70 price target on the shares.

PRICE ACTION: In late morning trading, McDonald's fell 1.7% to near $120 per share, Wendy's lost 1% to about $9.90, Papa John's dropped fractionally and Domino's fell 1.6% to about $125 per share.

Disclosure: None.

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Moon Kil Woong 2 years ago Contributor's comment

When American's slow down going out to eat that means they are really hurting. Why many ask when inflation is down and the jobs market is good? Because inflation has been eating the middle class alive and most of it is housing costs which are purposefully hidden from inflation reporting. As for the jobs market, with the amount of Americans working plumbing to new lows, no, I'm not impressed with our jobs recovery. Of course the argument is they don't want to work.

Regardless of if they do or not, the result to our economy is the same. It's not good.

Roland Murphy 2 years ago Member's comment

I would have thought that the troubled economy would have sent the middle class to places like #McDonalds in droves. Why? Because they can no longer afford the more upscale restaurants they used to frequent, and/or as they work extra hours, or two part-time jobs, they no longer have time to cook themselves. $MCD.

Moon Kil Woong 2 years ago Contributor's comment

Well I'd like to think it also has to do with Americans being more health conscience. Ugghh, what am I saying? That is a big hope, however, I don't actually see a lot of follow through. The good news is soda sales growth is also going flat, so maybe there is hope after all.

Alexa Graham 2 years ago Member's comment

I hear there will be a soda sales tax soon. That will hurt $KO, $PEP and the other soda companies. I wonder if it will apply to SodaStream ($SODA). Regardless, it shouldn't affect restaurants though - they charge just as much for water!

Roland Murphy 2 years ago Member's comment

I assume eating healthier would play a factor as well. Though $MCD has been trying to promote healthier offerings on their menu for a while now. But it will take a lot of marketing for Americans to equate #McDonalds with healthy!

Joe Black 2 years ago Member's comment

If true, I wonder if #McDonald's woes have to do with more than just the economy.