McDonald's, fresh off hitting a new all time high of $221.93 last week, could see more upside ahead.
That's what MKM Partners believes: on Tuesday the firm initiated McDonald's at a "buy" rating and a price target of $250, the second highest rating on the street. The analyst says strong domestic and international sales growth are sustainable, especially with the continued integration of digital and growth of delivery.
Joe Terranova of Virtus Investment Partners agrees increased investment in digital is key to success. "When you have a strong digital strategy and you're combining it with fast food service, you are going to gain momentum and that's what McDonald's has done," he said on Tuesday's "Halftime Report."
CEO Steve Easterbrook deserves credit for a "remarkable job in totally transforming the company on the digital side, on the menu side and...on the consumer experience side," agrees Nuveen's Stephanie Link, who also owns the stock. Since Easterbrook took over in March 2015, the stock has risen 122%.
McDonald's is one of the "safest stocks" available, argues Jon Najarian of Najarian Family Office, as proven by its performance after reporting earnings last month. "They were just in line. You show me another stock where it's just in line with revenues, in line with earnings per share. That stock is going to get slammed. McDonald's didn't. In fact, it's like $6 higher than when they reported. Nobody wants to get out of this stock."
The valuation does concern Link and Terranova, though. Link warns expectations are "mighty high" — 75% of sell side analysts already have buys on McDonald's. Terranova is "wondering when the shoe is going to drop."
Perhaps surprisingly, McDonald's is lagging the restaurant sector year to date. It is up 24%, but Shake Shack is up 100%, Chipotle 89% and Wendy's 66%. The trade-off is, as Link warns, that "these other stocks have more beta and higher growth and much higher multiples." McDonald's currently trades at 27x forward earnings; Shake Shack trades at 143x and Chipotle at 69x.
As for the restaurant sector's successful year so far, Josh Brown of Ritholtz Wealth Management says there are outside factors at play. He points out Shake Shack, which he consistently champions on the "Halftime Report," is up 100% this year even though its fundamentals haven't improved by that amount. Why? "The reality is Wall Street likes these companies again and a lot of it has to just do with an overall strong environment.. The consumer is doing well, the best restaurant stocks do well. That's a truism."
Disclosure: Josh Brown owns shares of Shake Shack. Stephanie Link and Joe Terranova own shares of McDonald's.