McDonald's breakfast turns shares into hot cakes

Published Wed, Oct 14 20156:00 AM EDT

After seven straight quarters of negative U.S. same-store sales, investors are expecting a big turnaround for McDonald's , with sentiment decidedly turning the day after the chain announced all-day breakfast Sept. 1. They've already turned around the shares. After being down as much as 7 percent year to date as recently as August, the stock is up 10 percent this year compared to the market's 2 percent decline. Shares of the largest restaurant in the world trailed the S & P 500 by a total of 70 percent from 2011 to 2014. The stock is up double digits since the breakfast announcement at the start of last month. Analysts cite the potential power of additional sales leverage from the full-day breakfast service. "Operational and menu improvements appear to be driving the U.S. recovery, with same-store sales turning from modestly negative in early second quarter, to modestly positive later in the quarter, according to our checks," Credit Suisse's Jason West wrote in a note to clients Sept. 29. West believes an upturn in sales will gain momentum the rest of the year. He estimates the all-day breakfast, which launched Oct. 6, could add 2 percent to revenue in the fourth quarter. Read More Good times for airline stocks appear to be over West has a "buy" rating on McDonald's with a $112 price target, representing more than 8 percent upside from Tuesday's price. It won't take that much for breakfast to start improving McDonald's bottom line. The chain just needs to add 14 additional transactions per store, per day and it will add 1 percent to the quarterly sales comp figure, according to a note from Peter Saleh of BTIG. Some investors appreciate McDonald's as an investment for different reasons. "It is hard to tell if the McDonald's turnaround is for real yet. I think that investors are optimistic even just based on a simple sales trend mean reversion. McDonald's has been a big share donor as industry numbers have rebounded in the last year or so, and we have probably crested this beef price cycle," said Nick Mazing of Ampera Capital in an email. Dave Alton Clark, a top-ranked investment blogger, likes McDonald's due to its 3.4 percent dividend yield. "McDonald's is making all the right moves when it comes to revamping the menu and enhancing the quality of ingredients..I suggest layering in over time to reduce risk," said Clark said in an email. Read More The force is with these 'Star Wars' stocks Even with the recent performance and some bullish calls, there is still a lot of skepticism toward McDonald's on the Street. As of Tuesday, 67 percent of Wall Street analysts who cover McDonald's rate it either "sell" or "hold," according to FactSet. This compares to just 42 percent for Chipotle Mexican Grill and 48 percent for Buffalo Wild Wings . The Street's uncommon negative bias against McDonald's could be seen as good news. If the company continues to beat estimates from better sales trends, analysts will be forced to upgrade, driving the stock higher. Disclosure: Nick Mazing's Ampera Capital has a long position in MCD.

McDonald's Egg McMuffin

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They've already turned around the shares. After being down as much as 7 percent year to date as recently as August, the stock is up 10 percent this year compared to the market's 2 percent decline. Shares of the largest restaurant in the world trailed the S&P 500 by a total of 70 percent from 2011 to 2014.

The stock is up double digits since the breakfast announcement at the start of last month.

Analysts cite the potential power of additional sales leverage from the full-day breakfast service.