UPDATE: McDonald's super-sized growth potential spells trouble for competing fast-food chains
By Tonya Garcia, MarketWatch
McDonald's is top 2018 pick at Instinet, while BTIG downgrades Jack in the Box
McDonald's Corp. is a super-sized threat to the competition, with analysts highlighting the potential market-share losses other fast-food chains will suffer as McDonald's initiatives launch throughout the year.
Instinet analysts named the fast-food giant its top U.S. restaurant pick for 2018 citing a number of factors, including the rollout of fresh-never-frozen beef for quarter-pound patties in nearly all of its restaurants by midyear.
With the test of new Archburgers in seven restaurants, fresh beef could be headed to burgers with different-sized patties as well, analysts say.
The company's new Dollar Menu, which includes a sausage burrito for $1, a Bacon McDouble at $2, and the Classic Chicken Sandwich for $3 and will be introduced nationwide in the coming days, is also seen as a potential boost to same-store sales.
See also:Chipotle, Domino's and other restaurant stocks haven't taken into account all the tax reform benefits (http://www.marketwatch.com/story/chipotle-dominos-and-other-restaurant-stocks-havent-taken-into-account-all-the-tax-reform-benefits-2017-12-13)
In addition to the initiatives highlighted in the Instinet note, McDonald's (MCD) is rolling out a new "experience of the future (http://www.marketwatch.com/story/mcdonalds-introduces-signature-crafted-recipes-sandwiches-in-florida-hiring-5000-workers-2017-05-04)" at its restaurants, which includes digital ordering kiosks and table service.
Taken together, Instinet analysts led by Mark Kalinowski think McDonald's is poised to snap up market share, particularly from Subway. Media reports say (http://www.marketwatch.com/story/mcdonalds-is-top-restaurant-pick-at-instinet-on-fresh-beef-dollar-menu-subway-troubles-2018-01-02) the sandwich chain is struggling with a 25% traffic decline in the last five years.
Subway, which is privately held, is the third-largest U.S. restaurant chain, with Instinet estimating U.S. sales of $10 billion in 2017. Instinet thinks hundreds of Subway franchisees are in financial trouble, and "would not be surprised" to see hundreds of closures during 2018. Subway currently has more than 25,800 stores domestically, analysts say.
Read:Chipotle's search for a new CEO may help it 'rediscover the magic,' says analyst (http://www.marketwatch.com/story/chipotles-search-for-a-new-ceo-may-help-it-rediscover-the-magic-says-analyst-2017-11-29)
"Subway is clearly troubled, and this continues to represent a market-share opportunity for other quick-service concepts in the U.S. -- including McDonald's, and arguable perhaps even to a greater degree than any other single quick-service concept," Kalinowski wrote.
Instinet rates McDonald's shares buy and raised its price target to $190 from $180.
Analysts at BTIG also raised their McDonald's price target, to $200 from $175, based on some of the same efforts as those emphasized at Instinet, including the new Dollar Menu and mobile ordering and delivery.
"After several years of playing defense, we believe McDonald's is finally returning to an offensive strategy which will yield stronger comp growth and increased market share," wrote analysts led by Peter Saleh.
The Dollar Menu should help the company regain some of the 500 million transactions it has lost, "adding a potential 125-to -175 basis points to same-store sales annually over the next several years," he added
BTIG rates McDonald's shares a buy.
Don't miss:Mobile orders are creating headaches for restaurant chains (http://www.marketwatch.com/story/mobile-orders-are-creating-headaches-for-restaurant-chains-2017-11-21)
One of the companies that Saleh thinks will suffer as a result of the McDonald's upswing is Jack in the Box (JACK), which the team downgraded to neutral from buy.
"Our view of the strength of McDonald's initiatives around value, digital and food quality... leads to a dimmer view of competing concepts which we expect will be market share donors," Saleh wrote in a separate note. "We recognize there are still positives to the Jack in the Box story including the finalized sale of Qdoba (http://www.marketwatch.com/story/jack-in-the-box-selling-qdoba-for-305-million-2017-12-19), refranchising and tax reform benefit, but the weaker sales outlook leads to a more balanced view of the shares and we are downgrading accordingly."
Jack in the Box shares are down 10.1% for the past year while McDonald's stock has gained 44% over the same period. The S&P 500 index is up 20.1% for the last 12 months, while the Dow Jones Industrial Average has climbed nearly 25%.
-Tonya Garcia; 415-439-6400; AskNewswires@dowjones.com
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01-03-18 1331ETCopyright (c) 2018 Dow Jones & Company, Inc.