Monday, January 28, 2013

McDonald’s: Piper Starts at Buy; Mind the Parking Lots

What can you tell from this picture?

Shares of McDonald’s (MCD) climbed 92 cents, or 1.3%, to $71.51 today after Piper Jaffray analyst Nicole Miller Regan initiated coverage of the stock with an “Overweight” rating and an $85 price target.

The core of Regan’s view is the high-margin business in Asia-Pacific, Middle East, and Africa regions, with profit margin for franchises in those areas close to 90% of sales, better than that for MCD’s domestic operations. And volume growth “APMEA,” as she calls it, is double overall company volume growth at 6%.

Furthermore, remodeling of stores should add 6% to 7% “lift” to sales this year.

But the most fascinating part of the report is the fact that Regan and team have collected overhead imaging data on parking lots at McDonald’s franchises around the country. Using this data and testing against past store results, she believes she’s able to forecast a 1% rise in same-store sales. Each 1% rise in same-store sales adds 5 cents per share to earnings, writes Regan.

Here’s the detail:

We have resourced a process that provides us with parking lot imagery by which we are able, we believe, to better determine the direction of same-store sales trends. (We apply “parking lot filled” percentage change to historical correlations.) The initial back-testing period compared quarterly data from 2002-2007, which generated an approximate 0.60 correlation based on a sample of approximately 75 observations/quarter. Our current analysis is focused on approximately 1,200 outlets operated by franchisees, and is comparing the change in parking lot fill rates to the change in U.S. same-store sales results. The sample size is approximately 300 observations/quarter (120 observations/month).

Regan’s $85 price target is based on a multiple of 17.5 times her 2011 earnings per share estimate of $4.84.

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