This Fast-Food Giant Could Return a Quick 15% Gain

Investment advisors Sterne, Agee & Leach describe this restaurant chain as “the best-positioned player in the fast-food business.” Many analysts expect it to gain market share in the coming months due to menu upgrades and in-store decorative improvements.

#-ad_banner-#But the opportunity to profit from the company’s popularity likely won’t last long.

Traders are pushing up the stock price: During the week of May 16, shares hit a new all-time high. Moreover, technical analysis shows the stock can move significantly higher from here.

As the world’s leading fast-food hamburger chain, McDonald’s (NYSE: MCD) has been gaining clout in the coffee market. Going head to head with competitors like Starbucks (NYSE: SBUX) and soon-to-be-public Dunkin Donuts, McDonald’s ad campaign appears to be making a positive impression on customers. In fact, a recent study by research and marketing firm CustomersDNA found that McDonald’s coffee drinkers were the most loyal of all coffee consumers.

As a result of the strong beverage sales — especially of its premium coffee beverages, shakes, frappes and smoothies — McDonald’s same-store sales rose 6% worldwide in April compared with the same period last year. Analysts had only expected a 4% rise. Strong sales of classics such as the Big Mac and Quarter Pounder with Cheese also helped drive sales growth.

And despite rising food and commodity costs, the world’s biggest restaurant chain was able to offset higher expenses with moderate price increases, while maintaining its loyal customer base.

With nearly 33,000 worldwide locations, it might seem the fast-food company would have little room to expand internationally. But McDonald’s has a growing — and well-received — presence in China.

Hundreds of new train stations are being built across the Chinese mainland, giving McDonald’s the opportunity to expand throughout the country.

Europe is currently the company’s biggest market, accounting for about 40% of global sales. The United States follows a close second, accounting for about 35% of all sales. McDonald’s hopes to draw in new customers with menu upgrades and a more attractive storefront in these well-established markets.

Undertaking a $1 billion makeover, McDonald’s plans to redesign 14,000 U.S. stores by 2015. The existing decor will be replaced by higher-end wooden tables, faux leather chairs and a more subtle color scheme. The company also plans to expand its menu selection with more upscale, health-conscious menu choices in an attempt to attract a more well-heeled market.

So far, traders have responded positively to McDonald’s plans to upgrade its dining experience.

Technically, shares are on a tear, hitting an all-time high of more than $82.50 during the May 16 trading week.

Since September 2009, the stock has been on a Major uptrend.

In March 2011, shares briefly touched an important level of support, near $72.50, which was marked at that time, by the intersection of the Major uptrend line.

A testament to the stock’s strength, shares rebounded quickly instead of breaking support, forming an accelerated uptrend line. At this time, the stock also bullishly completed a large ascending triangle pattern.

Continuing upward, this May the stock pierced old resistance — which has become new support — near $77 a share. Upon breaking resistance, the stock bullishly completed a second ascending triangle pattern.

The immediate price target is near $90. But with no resistance in sight, the stock could continue to soar higher to the mid-$90s and perhaps even $100 a share.

From a fundamental outlook, McDonald’s also shows strong growth potential.

In late April, the fast-food behemoth reported solid first-quarter results. Revenue for the period handily beat analysts’ expectations of $5.9 billion, rising to $6.1 billion, an 8.9% increase from $5.6 billion in the same period last year.

For 2011, analysts project revenue could increase 9.3% to $26.3 billion, from the $24.1 billion seen a year ago. With an expanding target market that’s willing to spend more on McDonald’s food, analysts expect 2012 revenue could increase a further 5.5% to $27.8 billion.

The earnings outlook is equally positive. First-quarter per-share earnings marginally beat analysts’ expectations of $1.14, rising 15% to $1.15, from $1 in the year-ago period. The increase was driven by higher overall sales and better franchise performance worldwide.

Analysts expect per-share earnings could increase 10.6% to $5.10 in 2011, from $4.61 last year. By 2012, analysts project a further 9.2% increase, to $5.57 a share.

The company also offers an attractive 3% annual yield. In comparison, competitor YUM Brands (NYSE: YUM) only offers a 1.8% yield, while Starbucks yields 1.5%.

In addition, McDonald’s dividend is not likely to go away anytime soon. The company has increased its dividend over time. In November 2008, for example, it was $0.375 a quarter, roughly 60% of current levels.

Action to Take –> Given the company has a rising dividend, a strong fundamental outlook and highly bullish technicals, investors should consider going long on the trade. If you enter the position at the opening of trading on Monday, May 23, my recommended stop-loss is $72.89, which is near important historical support. I also recommend a target of 94.47, which is near $95 round number resistance. This way, I believe the potential profit in the trade could be more than 14.5%.