Citi raised its target on McDonald's shares. Competitors are doing even worse, the bank says

Citi has revised its target price for shares of McDonald's restaurant chain: it now expects them to grow by 25%. The investment bank drew attention to the problems of competitors, which may result in the closure of restaurants under their brand. McDonald's will be able to take advantage of the situation and expand wherever space becomes available, the bank believes.

Citi analyst John Tower raised his target price on McDonald's shares to $381 from $373, implying a potential upside of 25% from the stock's closing level on Tuesday, September 16. Tower's target was the highest target among 37 analysts tracking the restaurant chain's securities, MarketWatch shows. Citi also reiterated a buy recommendation on the stock.

According to Tower, McDonald's may prove to be a more attractive investment than other fast food chains, even though the entire industry is under pressure due to spending cuts among low- and middle-income consumers.

"In the short term, the investment idea is simple: hold the securities against the backdrop of McDonald's focused strategy of affordable pricing (including through massive marketing expenditures), a favorable comparison base [to last year's weak reports] and a possible widening of the price-to-earnings (P/E) multiple," Tower wrote, referring to the stock's price-to-earnings ratio. The Citi analyst's note is quoted by CNBC.

McDonald's, according to the analyst, is gaining an advantage by cutting menu-set prices more aggressively. "They haven't made any commitments beyond that, but we think this could be a new model that McDonald's could be the one to realize," SeekingAlpha quoted Tower as saying. - Competitors are seeing traffic decline at high single-digit and in some cases double-digit rates, a level not seen since the peak of the financial crisis. It's hard to imagine that this won't lead to point closures, which in turn will reinforce the negative spiral in the franchise model and leave McDonald's with significant amounts of revenue to capture."

Citi expects additional momentum by 2026 for McDonald's to grow its beverage business, especially energy drinks.

In early September, the fast-food chain announced that it was expanding its value-priced offerings to appeal to savings-minded customers. The company has brought back Extra Value Meals sets to the menu, which were last heavily promoted before the Covid-19 pandemic. McDonald's believes that customers will be able to save 15% on combo sets compared to buying a meal, fries and a drink separately.

For more than a year, McDonald's and its competitors have relied on discounts and promotions to bring customers back to their restaurants, CNBC wrote. The chains' sales have been pressured by rising prices, AP noted. According to last quarter's report in early August, McDonald's comparable sales - revenue at restaurants that have been in business for at least a year - rose 2.5 percent in the U.S.. However, they increased mostly due to price increases, not customer numbers, AP wrote. Visits to fast-food establishments by low-income consumers fell at double-digit rates across the industry in the second quarter, McDonald's reported.

On September 3, investment bank Goldman Sachs added McDonald's securities to its Conviction List, a list of 22 best investment ideas. This is a worrying sign for the U.S. economy, as declining consumer confidence leads consumers to the segment of economy-class goods and services, Barron's noted in early September. Despite the rise in the stock market, most Americans remain pessimistic about the economy, the publication explained.

Goldman believes the current macroeconomic environment favors the company. "McDonald's has the scale, marketing power and digital reach that will help it successfully navigate through consumer market uncertainty," the bank's analysts wrote. Their target price on the stock is $355, which is 17% above the securities' current value.

A total of 46% of analysts tracking the restaurant chain's securities advise to buy, 49% recommend to hold, and 5% recommend to sell. The Wall Street consensus price target is $334.8, which implies a 10.4% increase.

This article was AI-translated and verified by a human editor