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Fast-food giant McDonald’s remains a good bet for investors even as U.S. restaurants contend with a slowdown in business due to the coronavirus pandemic, according to a prominent equity research firm.
The rapid spread of COVID-19, the illness caused by coronavirus, has forced McDonald’s and various other U.S. businesses to substantially scale back operations. While the changes will impact foot traffic in the short term, McDonald’s is well-positioned to recover from the financial strain, Baird Equity Research said in a note to investors on Wednesday.
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“Among the companies in our coverage universe, we consider MCD among the best positioned to manage through the highly uncertain demand backdrop being caused by the coronavirus pandemic,” Baird analysts said in the note. “Specifically, MCD appears to have plenty of liquidity to support its franchisees as they work through short-term sales and cash flow issues, and history suggests the McDonald's brand contains recession-resistant qualities that should allow for better-than-average fundamental performance in [the second half of 2020 and 2021].”
Coronavirus has already had a significant impact on McDonald’s global business. The fast-food giant shuttered stores in some European markets, including the United Kingdom, France and Italy, as part of its efforts to manage the crisis.
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Last month, McDonald’s said it would limit service at company-owned stores in North America to drive-thru, walk-in and delivery orders and temporarily shutter seating areas. Franchisees were advised to enact the same protocols.
Several other food chains, including Starbucks and Chick-Fil-A, have enacted similar measures as U.S. authorities encourage social distancing practices.
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Baird noted that McDonald’s will have a projected cash balance of nearly $7 billion as of the end of the fiscal first quarter, providing a reserve to help franchisees until it can return to normal business. The recent passage of a government stimulus package is expected to provide further relief.
The war chest puts McDonald’s on a path to rebound even if the U.S. economy falls into a recession, according to the firm.
“We believe MCD is well-positioned to perform strongly on a relative basis in this scenario when considering global comps for McDonald's during 2008-2009 were a recession-resilient +5.4% (best-performing brand in our coverage universe),” Baird said.
McDonald’s shares are down more than 20 percent this year and closed at about $158 on Wednesday. Baird set a $184 price target for the stock.