McDonald's Stock Price Targets Are Higher - Shorting MCD Puts Works Here

<p>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.</p>
<p>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).</p>
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<h2>Free Cash Flow (FCF) Based Price Target (PT)</h2>
<p>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?"</p>
<p>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:</p>
<p>$8.16b / 0.03 = $272 billion mkt value</p>
<p>$272 / $233.88b mkt cap today = 1.163</p>
<p>That implies a price target of $379.58 per share. That's slightly higher than my previous $374.92 PT.</p>
<p>Other analysts agree. They have raised their price targets since the earnings release.</p>
<h2>Other Price Targets Higher</h2>
<p>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.</p>
<p>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.</p>
<p>In addition, a historical dividend yield price target, as shown in my last article, works out to $338.57.</p>
<p>As a result, using these three methods, MCD's price target is now $357.31, or 9.1% higher:</p>
<p>FCF-Based PT …… $379.58</p>
<p>Analysts' PT ……… $353.78</p>
<p>Div Yld PT ………… $338.57</p>
<p>Average PT …………$357.31</p>
<p>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.</p>
<p>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.</p>
<h2>Shorting OTM MCD Puts</h2>
<p>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.</p>