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McDonald’s new value menu will trigger fast food pricing war

McDonald’s new value menu could be the spark to ignite a new fast-food price war, spelling upside for the Happy Meal restaurant and putting competitors to the test, according to Credit Suisse.

As the globe’s largest restaurant by revenue, McDonald’s will be putting its size and market share to work in January, when it launches a new value menu reminiscent of its former Dollar Menu. The new menu includes any size soft drink and cheeseburger for $1, small McCafe drinks and bacon McDoubles for $2 and Happy Meals and triple cheeseburgers for $3, according to the company.

“Fast food competitors are gearing up to combat this new value effort from McDonald’s, setting up 2018 as a potential year for intensive discounting in the fast food space, particularly in the first part of the year,” warned analyst Jason West on Tuesday. West cited Jack in the Box’s plans for new value messaging in January as well as Taco Bell’s initiative to expand its own dollar menu throughout 2018 in his assessment.

West noted that Wendy’s, Jack in the Box, and Sonic appear most exposed to McDonald’s value push, noting that each 1 percent miss on U.S. same-store sales corresponds to a 3 percent impact on earnings for the names. None of the companies noted immediately responded to CNBC’s request for comment.

The analyst increased his 12-month price target on McDonald’s to $185 from $178, representing 6 percent upside from Monday’s close. And while West increased his same-store sales estimate for the fourth quarter to 5 percent, he remained unsure of the total impact the new pricing would have in driving sales and traffic at McDonald’s.

McDonald’s franchisees disliked the original Dollar Menu since selling items like a double cheeseburger for $1 cut into profits; those same franchisees may be worried about the value menu reboot following a similar path.

“Our feedback from McDonald’s franchisees has been mixed on this front,” noted West. “Some franchisees expect a meaningful lift in sales and traffic (perhaps +2-3%). Others are not sure that the impact will be material right away, but will build over time (as was the case with the Dollar Menu).”

McDonald’s is performing the best it has in years, up 43 percent since January, though shares slipped 0.4 percent Tuesday.

A swell of Wall Street support has followed McDonald’s success and initiatives. Earlier this month, Jefferies upgraded the company, highlighting what many other views as a money-maker in the restaurant space: delivery.

Since CEO Steve Easterbrook took the reins in early 2015, the company has worked to counter several years of slumping sales, margins and earnings growth. As the “latest and greatest” trend in fast food, delivery poses an interesting new avenue for the industry. McDonald’s currently partners with Uber to deliver orders in select urban areas.

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