After missing McDonald's rally to a record, Goldman upgrades anyway because it's still 'early'

Key Points
  • Goldman is optimistic McDonald's mobile and kiosk digital ordering initiatives will improve its earnings results.
  • The firm raises its price target for the restaurant chain to $153 from $126, representing 8 percent upside to Tuesday's close.
Customers use digital menu screens to order food at a McDonald's Corp restaurant.
Andrey Rudakov | Bloomberg | Getty Images

After missing the McDonald's rally this year Goldman Sachs is changing its mind, saying the company's sales will continue to improve in the coming years due to its new technology initiatives.

The Wall Street firm raised its rating Wednesday on the restaurant chain to buy from neutral and predicted earnings this year will come in above expectations.

McDonald's shares hit an all-time high last week and are up 16 percent this year through Tuesday versus the 7 percent return.

Goldman's Karen Holthouse shared her two key reasons for the move:

"We acknowledge we are upgrading near an all-time high in shares, but have evolved in two key areas of our thought process, (better visibility into 1) the 'experience of the future' [mobile and kiosk digital ordering] rollout in the U.S. and 2) valuation versus refranchising-driven estimate uncertainty), see signs of evolution in a key risk (US value), and view digital/delivery initiatives as open-ended, multi-year upside."

The analyst raised her McDonald's price target to $153 from $126, representing 8 percent upside from Tuesday's close.

Holthouse cited how the company will roll out the mobile and kiosk digital ordering to 2,500 US restaurants this year.

"MCD's app is seeing improving reviews and strong download rankings, with positive customer commentary on personalized coupons/offers," she wrote. "We also view scale as a competitive advantage, with the sheer volume of data collected allowing a shorter feedback loop on behaviors/more agility."

In addition, the analyst noted how McDonald's sales numbers started getting better in early 2015 and previous sales outperformance cycles lasted eight years. The company "still could be very early in the cycle," she added.

As a result, Holthouse raised her McDonald's 2017 earnings per share forecast to $6.48 from $5.99 versus the Wall Street consensus of $6.38.

"Delivery also is expanding beyond the initial test market, and we see the potential for these initiatives to drive upside to our multi-year comp outlook and investor excitement about a multi-year comp cycle," she wrote.

— CNBC's Michael Bloom contributed to this story.