McDonald's shares rise after Jefferies says UberEats delivery will drive sales next year

Key Points
  • Jefferies upgrades McDonald's to buy and sets a $200 price target, representing 17 percent upside over the next year.
  • "We find the combination of digital, remodels and delivery will make a +3 percent U.S. same-store sales result very visible," analyst Andy Barish wrote to clients Tuesday.
An employee delivers a tray of food to a customer's table inside a McDonald's Corp. restaurant.
Paul Thomas | Bloomberg | Getty Images

McDonald's initiatives in digital sales, delivery and store remodeling are set to drive sales higher for the fast-food giant, a Jefferies analyst said Tuesday.

Since CEO Steve Easterbrook took the reins in early 2015, the company has worked to counter several years of slumping sales, margins and earnings growth, according to analyst Andy Barish, who upgraded the shares to buy.

"We find the combination of digital, remodels and delivery (with UberEats) will make a +3 percent U.S. same-store sales result very visible with potential upside depending on how quickly initiatives gain traction," Barish wrote in a note to clients. "Additional efforts around national value (to come in early 2018), quality, premiumization (fresh beef in quarter-pounders, Signature Crafted), and beverages could layer additional sales."

As the "latest and greatest" trend in fast food, delivery poses a host of new opportunities — and challenges — to the industry. Companies including Uber help ease some of the logistical and financial burden on the restaurant companies, who otherwise do not have established delivery options. McDonald's currently partners with Uber to deliver orders in select urban areas.

"I think it really comes down to continued comfort with the U.S. same-store sales momentum, with a number of drivers in place," Barish told CNBC's "Power Lunch" Tuesday afternoon. "Secondly, the financial re-engineering to a more franchise business model is really going to show through in terms of some operating margin expansion and more free cash flow over the next few years."

The analyst raised his 12-month price target McDonald's to $200 from $150, representing 17 percent upside from Monday's close. Shares were up 1.8 percent Tuesday, adding to the stock's 40 percent climb this year.

In highlighting the company's path forward to 3 percent same-store sales acceleration through 2020, Barish noted key catalysts such as digital, mobile order and pay as well as delivery service. A "key outcome" of mobile order is an increased bill, as the experience is less rushed and more complete, he said.

"Technology never forgets to ask you about up-sizing or adding-on, and can easily save guest favorites and tie payment into the app," Barish said. "McDonald's is taking it a step further, and even trying to ensure hot and fresh food by utilizing geo-fencing technology so that an order is not fired and prepared until the consumer is in proximity to the store, whether it is an in-store, drivethru or curbside transaction."

For its part, McDonald's said Monday it would introduce new menus with $1, $2, and $3 items in early January in an attempt to re-create a new version of its popular "Dollar Menu." McDonald's dropped the "Dollar Menu" in 2013 on profit concerns.

Set to debut on Jan. 4, the new menu will include any size soft drinks and cheeseburgers for $1, small McCafe drinks and bacon McDoubles for $2 and Happy Meals and triple cheeseburgers for $3, McDonald's said.