McDonald’s Corp.’s new promotion down south that offers customers a little fries along with a double cheeseburger for US$2.50 bodes well for that company’s prospects come july 1st.
The nationally advertised U.S. value tier looks nearly the same as one David Palmer at RBC Capital Markets believes worked well for the fast-food chain in the New York City area, giving him more confidence in the above-average earnings estimates for 2015 and 2016, in addition to his outperform rating and US$110 price target around the stock.
Palmer noted the promotion doesn’t look as compelling or as “protein-forward” as Burger King’s US$1.49 10-piece nugget or two for US$5 sandwich deals. However, he thinks McDonald’s offering will probably be more powerful because of the low value profile it\’s sustained in the past few years.
“As we found in our consumer purchase intent study, the fastest near-term fix for McDonald\’s would be to become sharper on value,” Palmer said inside a note to clients. “By easing away from the Dollar Menu at the end of 2012, it failed to support one of its key brand attributes (e.g., value) and undercut certainly one of its main scale advantages (e.g., national advertising).”
July is expected to be a critical month for McDonald’s, using its earnings call looking for July 23. Palmer believes a turn for the better in the company’s U.S. division, which accounts for about 40 percent of profits, could become visible in front of that date because of the new value tier and other changes such as improved food quality and transparency marketing, more customization, and the launch of digital payments.
“Although it will be left as much as the company as to how it communicates how Q3 is beginning, we believe July is going to be indicative of the trajectory of the U.S. recovery,” the analyst said.