The Ratings Game: McDonald’s downgraded after CEO Easterbrook ouster over concerns about stock disruption

This post was originally published on this site

McDonald’s Corp. was downgraded to neutral from overweight at Piper Jaffray over concerns that the exit of Chief Executive Steve Easterbrook will be unsettling for investors and pressure the stock.

Piper Jaffray cut its stock price target to $195 from $224.

McDonald’s MCD, -2.53%   shares were down 2% in Monday premarket trading.

McDonald’s announced over the weekend that Easterbrook was leaving the fast-food giant after violating company policy by having a consensual relationship with an employee.

“Given the values of the company, I agree with the board that it is time for me to move on,” Easterbrook said in an email, according to The Wall Street Journal.

Read: McDonald’s expected to jump into the chicken sandwich war next year: KeyBanc

The board named Chris Kempczinski, president of McDonald’s USA, to the CEO position. Joe Erlinger, previously the president of the company’s international operations, will succeed Kempczinski domestically.

“Our experience leads us to take a more cautionary view noting the potential lack of momentum and time involved in formalizing a new team,” Piper Jaffray wrote.

Analysts don’t think the company strategy is at great risk, but they are acting with caution.

“Our change in opinion in no way reflects the company’s ability to dominate in terms of global market scale, the effectiveness of its leadership team, or the effort behind its franchise network,” the Piper Jaffray note said. “It does reflect the notion that changes of this magnitude are disruptive and tend to not occur in isolation. Hence, an expected delineation between company and stock performance.”

Piper Jaffray recommends a shift to Chipotle Mexican Grill Inc. CMG, -1.09%   shares “based on limited-service exposure as well as the ongoing recovery nature of the company that lends itself to the most potential upside within our universe of coverage.”

Piper Jaffray rates Chipotle shares overweight with a $904 price target.

See: Chipotle’s carne asada supply is running low, bringing the limited-time offer to an early end

Two weeks ago, McDonald’s reported profit and revenue that fell short of third-quarter expectations. Same-store sales rose 5.9%, exceeding the FactSet consensus for a 5.4% rise.

MKM Partners thinks there could be some near-term stock pressure, but maintained their buy rating. They cut the price target to $225 from $240.

“We believe there’s more of a psychological impact on the company and stock than actually impacting results,” Brett Levy wrote in a note. “Fundamentally, management provided the Street with an update two weeks ago and posted strong global same-store sales (and a still solid domestic comp, even if it failed to meet recent expectations) and we do not view this news as impacting the recent trends. From a stock perspective, the shares have been under pressure for a couple of months and we do not believe this news will ease any recent concerns.”

McDonald’s shares are down 9.6% over the past three months, but the stock is up 9.2% for the year to date. The Dow Jones Industrial Average DJIA, +0.44%   is up 17.2% for 2019 so far.

Still, there are risks, Levy says, including the competitive food landscape and the degree to which the company relied upon Easterbrook to navigate the challenges.

Don’t miss: Beyond Meat’s McDonald’s trial hasn’t been a ‘blowout,’ Bernstein analysts say

While Raymond James analysts credit Easterbrook with jump starting a turnaround with his assumption of the CEO position in 2015, they think the management team will “provide stability through this unexpected transition.”

Raymond James rates McDonald’s stock market perform.

Analysts give Easterbrook credit for the company’s technology advancements, improved food quality, like the use of fresh beef in its burgers, and streamlined internal processes.

Kempczinski, who also joined the company in 2015, said he would continue what Easterbrook started.

“There isn’t going to be some radical, strategic shift. The plan is working,” Kempczinski said over the weekend, according to the Journal.