Bull Of The Day: McDonald’s; Bear Of The Day: JC Penny

Bull of the Day

McDonald’s (MCD) continues to report strong same-store sales, driven by the consumer trade down from casual dining, and menu variety. Global comps rose 4.3% in 1Q09 (U.S. +4.7%, Europe +3.2%, APMEA +5.5%).

Although comps are getting tougher and the U.S. dollar has strengthened, we think further growth is possible through menu innovations, margin improvement in APMEA, where company-operated restaurant margins lag the US by 260 basis points, G&A leverage, and share repurchases. We expect continued headwinds from a stronger dollar, but those impact translation only, not the fundamentals of overseas operations, which operate entirely in local currency.

With a strong balance sheet, consistent earnings, healthy cash flow, high ROE (30%) and a generous dividend, we think this stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets.

Bear of the Day

We are downgrading JC Penney (JCP) from Hold to Sell. The stock is up about 90% off its March lows. We think the shares have moved too far, too fast, given that the retailer is still several quarters away from seeing a real rebound in its business.

Moreover, management is pointing to signs of stabilization in its business, we note that JC Penney’s sales and earnings will experience sever declines in 2009. We previously upgraded the stock on February 8, when it traded around $16. We felt that at that price the stock discounted much of the bad news.

However, with the stock trading around $27, we think the stock has substantial downside risk. Our target price is $16, which 20x our fiscal 2010 EPS estimate.

Recent Analysis from the Analyst Blog

Targeting Credit Card Practices

Today, President Obama is meeting with the heads of many large banks/credit card issuers including Bank of America (BAC), Capital One Financial Corp. (COF) and American Express Co. (AXP) to discuss credit card fees and practices.

The House Financial Services Committee yesterday passed the “cardholders bill of rights,” which among other things seeks to ban “arbitrary” interest rate increases, prohibit excessive fees and order more disclosure. The bill is expected to go to the full House for a vote next week.

It appears quite unfair that the banks that are getting money at near-zero rates while gouging their customers by increasing rates charged and then also reducing the credit lines. However, do we not expect the banks to have learned from the mistakes they made in housing loans, when they lent money on very easy terms to people who did not have the ability to repay those loans?

Subscribe by RSS Subscribe by Email