McDonald's Stock Price Targets Are Higher - Shorting MCD Puts Works Here
McDonald's Corp (MCD) stock has benefited from higher analysts' price targets since its Feb. 11 earnings release. But the stock has been relatively flat. That makes it ideal for short-sellers of out-of-the-money (OTM) MCD puts.
MCD is at $326.82 in midday trading on Monday, March 16, about where it was a month ago ($327.62 on Feb. 17). But it could be worth at least 9% more at $357 per share, based on analysts' price targets as well as its strong free cash flow (FCF).
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Free Cash Flow (FCF) Based Price Target (PT)
I discussed this in my last Barchart article on Feb. 15 ("Analysts are Lovin' McDonald's With Higher Price Targets and Estimates - Is MCD Stock a Buy Here?"
I discussed the company's strong FCF and FCF margins. Based on analysts' revenue estimates, I showed that McDonald's could generate $8.16 billion in FCF. Using a 3.0% FCF yield metric, this implies MCD could be worth 16% more:
$8.16b / 0.03 = $272 billion mkt value
$272 / $233.88b mkt cap today = 1.163
That implies a price target of $379.58 per share. That's slightly higher than my previous $374.92 PT.
Other analysts agree. They have raised their price targets since the earnings release.
Other Price Targets Higher
For example, Yahoo! Finance now shows that the average PT of 38 analysts is $344.09. That's up from $340.03 a month ago. Similarly, Barchart's survey price is now $346.82, up from $342.81.
Lastly, AnaChart's survey of 23 analysts is now $370.43, up from $367.16. So, the average survey PT is now $353.78, up from $350 a month ago.
In addition, a historical dividend yield price target, as shown in my last article, works out to $338.57.
As a result, using these three methods, MCD's price target is now $357.31, or 9.1% higher:
FCF-Based PT …… $379.58
Analysts' PT ……… $353.78
Div Yld PT ………… $338.57
Average PT …………$357.31
That's up from $353.83 last month. In other words, MCD's upside is slightly better. Nevertheless, MCD stock has been flat over the last month.
As a result, it makes sense to short out-of-the-money (OTM) puts in a one-month expiry period. That way, an investor can set a lower potential buy-in point, but also get paid while waiting to buy in.
Shorting OTM MCD Puts
For example, look at the April 17 expiration period. It shows that the $315.00 strike price put contract, which is 4% lower than today's price, has a midpoint premium of $3.01.
