McDonald's Downgraded As U.S. Restaurant Trends Seen Slowing

Research firm Nomura downgraded McDonald's (MCD) to Neutral from Buy, citing weak sector sales and tough upcoming comps for the fast food giant.

WHAT'S NEW: U.S. restaurants' same-store sales have slowed this quarter and may "remain sluggish" for the rest of 2016, according to Nomura analyst Mark Kalinowski. The burger space is performing even worse than the restaurant sector as a whole, as its same-store sales look poised to rise by less than 1% this quarter versus the same period a year earlier, the analyst stated. Meanwhile, McDonald's, along with the entire restaurant sector, is facing moderately tougher comparisons in Q3 and much more difficult comparisons in Q4, the analyst wrote. Contending that McDonald's is finding it increasingly difficult to increase its same-store sales in the U.S. this quarter, Kalinowski lowered his Q2 same-store sales estimate for the company to 2.4% from 3%. Kalinowski wrote that he now has the lowest U.S. Q2 same-store sales outlook for McDonald's among sell-side analysts. The analyst lowered his price target on the shares to $129 from $142.

WHAT'S NOTABLE: Kalinowski also downgraded his rating on McDonald's competitor Wendy's (WEN) to Neutral from Buy. The analyst believes that Wendy's, like McDonald's, is being hurt by weakening U.S. restaurant trends this quarter and will be undermined by tougher comparisons in the second half of the year. He lowered his price target on the shares to $11 from $12.50. Kalinowski also downgraded Papa John's (PZZA) and Domino's Pizza (DPZ), each to Neutral from Buy. In addition to slowing U.S. restaurant trends, the analyst cited the possibility of increased competition from Yum! Brands' (YUM) Pizza Hut, valuation, and "the possibility of growing risks associated with driver accidents/insurance" as reasons for the downgrade. He kept a $70 price target on the shares.

PRICE ACTION: In late morning trading, McDonald's fell 1.7% to near $120 per share, Wendy's lost 1% to about $9.90, Papa John's dropped fractionally and Domino's fell 1.6% to about $125 per share.