McDonald’s Coiling Up for Third Quarter Breakout

Dow component McDonald’s Corp. (MCD) could trade higher in coming sessions after a Wells Fargo analyst predicted that reopenings of international locations will add greater second and third quarter income than previously forecasted. The stock has been rangebound since April, following a first quarter rally that lifted the fast food icon to an all-time high near 240. It’s now trading less than 7 points under that barrier and could break out soon, lifting above 250.

Industry Recovery Set to Accelerate

The restaurant industry continues to deal with pandemic headaches, despite widespread vaccinations. Many shell-shocked customers are still reluctant to eat indoors, caught in a lockdown mentality that’s slowly passing into history in first world countries. In addition, worker shortages in the United States have forced McDonald’s to raise wages at company-owned restaurants, with more than 36,500 employees receiving an average 10% pay raise.

However, Well Fargo analyst Jon Tower believes that investors are “missing the rapid re-opening of key International Operated Markets (IOM) and the associated potential for a sharp acceleration in IOM same store sales in Q2 2021 results and Q3 to-date commentary.” He backs up his theory, noting that “IOM is a larger driver of profits than the U.S. and our Q2/Q3 IOM store profits are $167/$132 million ahead of consensus, adding 6%/4% of potential upside to consensus EBITDA.”

Wall Street and Technical Outlook

Wall Street consensus has eased so far in 2021, now standing at an ‘Overweight’ rating based upon 23 ‘Buy’, 1 ‘Overweight’, and 9 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $225 to a Street-high $283 while the stock is set to open Thursday’s session more than $25 below the median $260 target. A little good news could go a long way in this configuration.

McDonald’s topped out near 220 in August 2019 and rolled over, dropping nearly 100 points into March 2020’s pandemic low. The subsequent uptick finally completed a round trip into the prior high in September, yielding a short-lived breakout. A first quarter downturn completed the handle of a cup and handle pattern in April but a quick buying spike failed to attract buying interest, yielding narrow rangebound action that could soon eject to the upside.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.