Deutsche Bank Downgrades McDonald's (MCD) to Hold

July 24, 2008 8:00 AM EDT

Deutsche Bank downgrades McDonald's (NYSE: MCD) from Buy to Hold and lowers their price target from $67 to $63.

Deutsche Bank has raised their forward EPS nearly $0.50 in the past year on strong comps and margin growth. However, the firm believes that further upside will be challenging as downside risks offset a reasonable valuation.

Deutsche Bank has three reasons for their downgrade, and said, "(1) Commodity costs, particularly beef (15% of COGS), will be much worse than expected in 2H08. New guidance implies mid-teens beef inflation in 2H08 in US and Europe. This is particularly problematic in the US given popularity of the Dollar Menu and the $1 double cheeseburger.(2) Risk of downside to traffic. MCD has done well in maintaining traffic to-date (especially in Europe), but we hold our breath every month when comps are released. Even defensive retailers, such as grocery chains, are seeing comps weaken. Plus, it seems that MCD's traffic needs to stay strong just to keep the stock where it is. (3) Slowing EPS growth and weaker margins likely limit multiple expansion. MCD trades at a reasonable multiple of 16.4x NTM EPS, but we see few catalysts for expansion as margins are likely to contract and EPS growth slows from very high levels."

McDonald's Corporation primarily franchises and operates McDonald's restaurants in the food service industry.

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