Trade Of The Week

McDonalds (MCD) Set Up for New Highs

Date: 1/15/18

McDonalds (MCD) shares are consolidating under new highs at $175 and above its 20-MA and range compressing in recent weeks. Above $175, shares have a measured move to $182.5 and MCD in a strong long-term trend higher. MCD has seen steady bullish flow including over 9,000 Jan. $175 calls in open interest, buyers last active in early December, and notable calls in the March $175, $180, and $185 strikes. MCD also has 1,500 Feb. 2nd (W) $175 and $177.5 calls in open interest targeting earnings on 1/30.

The $140B company trades 24.35X earnings, 5.97X sales, and 52.5X cash with a 2.33% yield and high-single digit growth. The company posted strong comps in October with 6% global growth vs 4.5% consensus with beverages and their McPick 2 promotion driving traffic. International was strongest with 6.2% comps in their fastest growing markets and a more accelerated pace in refranchising in China. MCD is looking at more aggressive strategies in 2018 to help offset wage hikes and other margin pressures. Institutional ownership fell 2.5% last quarter while short interest is negligible.

Analysts have an average target for shares of $177 with 24 buy ratings and 7 hold ratings. Sun Trust out with a $205 PT on 1/3 seeing tax reform as a windfall for the sector and boosting consumer spending. The firm thinks 50-100 basis points in comps improvement is possible with the shift away from deep value promotions. BTIG was positive on 1/2 raising their PT to $200 as the company shifts to a more offensive strategy behind their new Dollar Menu, Experience of the Future, Mobile Ordering, and delivery initiatives. US comps can likely remain in the mid-single digit growth range for years to come and US 2018 comps likely above 4%. Nomura named MCD their Top Pick for 2018 with a $190 PT. The firm thinks MCD can continue to take quick-service market share gains given the ongoing woes at third-largest chain Subway.

Trade to Consider: Long the MCD Feb. $175 Calls for $2.90 or Better

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