UBS Sees Strong Fast Food Trends, Says Buy MCD, YUM

�March saw a sequential slowdown in casual dining, but UBS analyst David Palmer remains bullish about fast food, as he believes momentum held steady in the sector and same store sales growth for both February and March are likely to be 4%-5%.

He maintained Buy ratings on both McDonald�s (MCD) and Yum Brands (YUM) although he was more enthusiastic about the latter.

For McDonald�s Palmer maintained his earnings per share estimates for the first quarter of $1.21, two cents below consensus. �We forecast March SSS growth for US, Europe, and APMEA SSS 9%, 5%, and 6% respectively, including approximately +2pp of calendar shift per region. While we are confident that US sales momentum remained strong, we are somewhat less certain about Europe given the weaker February and the limited time to adjust marketing. We expect McDonald’s Europe to shift marketing focus toward value to preserve traffic momentum–potentially at the expense of earnings upside.

As for Yum, he sees EPS of 74 cents a share, two cents ahead of the consensus as he sees mid-teen same stores sales growth in China, which accounts for nearly half of the firm�s profit. �We estimate that US SSS growth will be in the 2-3% range with Pizza Hut in the mid-single digit range, and Taco Bell sales ramping through the quarter. We note that 1Q included only three weeks of the �Doritos Locos� tacos.�

Palmer also maintained a Hold rating on Chipotle (CMG) even as he is positive about the chain�s traffic and upcoming quarter:

�We are maintaining our above consensus EPS and same store sales (SSS) growth estimates following results of our proprietary consumer panel through March. Based on the panel, we continue to believe that 1Q SSS growth will fall within the 10-13% range and are accordingly forecasting 11%. We also estimate that leap day added approximately +1pp to SSS growth in the quarter.

With Chipotle’s stock up 28% year to date, we believe the market may be expecting SSS growth near the high end of our 10-13% SSS range. In addition to recent sales, investors will try to understand if labor productivity initiatives could help SSS growth momentum continue even during the peak summer sales months, and if food cost leverage can significantly improve in 2H12.

Although we are maintaining our Neutral rating, our estimates reflect a view closer to that of our original best case earnings growth scenario. While our valuation work suggests that shares are close to fair value our base case now assumes Chipotle reaches a McDonald�s-like AUV of ~$2.4M and assumes 240bps of restaurant margin expansion within five years.�