McDonald's is under pressure due to 'deteriorating industry conditions'

  • McDonald’s is the worst performer on the Dow Friday.
  • A team of analysts at RBC Capital Markets downgraded the stock on “deteriorating industry conditions” and disappointing value menu sales.
  • Still, the company’s long-term prospects remain strong.
  • Watch the stock in real time here.

Shares of McDonald’s are down almost 5% Friday after a team of analysts at RBC Capital Markets warned of a dim outlook for the fast-food industry.

The team of analysts led by David Palmer downgraded the stock, and lowered its price target to $US170 a share from $US190, citing “deteriorating industry conditions and a disappointing early sales impact from the $US1, $US2, $US3 value menu.”

The fast-food giant announced its new dollar menu in January in an attempt to win back value-minded customers. But that prompted other chains to cut their prices as well.

Palmer isn’t so sure the price cut is working, and lowered his first-quarter US sales estimate to up 1% from up 3.5%. He says the new dollar menu campaign “stole attention from local marketing, particularly at breakfast, which likely slowed as a consequence.” Even worse, he wrote, McDonald’s new value-conscious effort “may have invited a flurry of competitor responses and diminished its overall impact.”

Still, investors don’t need to flee the stock because its long-term prospects remain strong. He thinks McDonald’s has numerous opportunities to boost same-store sales growth by creating “more effective value marketing, digital/delivery initiatives, product renovation,” he wrote.

McDonald’s may benefit from the tax plan, Palmer wrote, saying that improving wage growth may get more customers into restaurants. International markets are also a particular “bright spot” because of the weak US dollar.

McDonald’s is down almost 14% this year.

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