Student Investment Management (SIM)
SIM Analyst: Joseph P Chandraraj
SIM Portfolio Manager: Royce West
McDonald’s Corporation (NYSE: MCD)
Recommendation
HOLD
Price
$54.50
12-Mo. Target Price
$59.61
Data as of August 17, 2009
Upside**
13%**
Sector
Consumer Discretionary
Industry
Restaurants
** 13% upside includes 3.63% ($2.0) annual dividend yield. * Next earnings release: October 19, 2009
Investment Thesis: The one-year target price for MCD is $59.61 based on its competitive position within the fast-food/quick service
restaurant industry, current macro-economic factors, and its strategy to grow in both domestic and international markets. The valuation is based
on a Discounted Cash Flow (DCF) and Absolute Valuation Models. Revenues (company sales & franchise fees) in 2009 and 2010 are projected
to increase by 1.3% and 3.8% and EPS in 2009 and 2010 is projected to increase to $3.99 (up 6%) and $4.07 (up 2%); the consensus is
projected at $3.87 (up 3%) and $4.26 (up 10%). The HOLD recommendation comes due to the fact that McDonalds’ is a strong defensive play
against further risks to global economic rebound, an expected stock price appreciation of 9.4%, and a strong $2.0 (3.63%) annual dividend.
Also, McDonalds’ future earnings growth will be better than expected and therefore a high probability that the stock price will move towards
the 1 year target of $60.
Stock Performance:
YTD McDonald’s vs. Peers
41.40%
38.40%
-1.20%
Catalyst for the share price:
16.10%
-11.90%
YTD – S&P500 vs. McDonald’s
20.0%
S&P,
8.4%
10.0%
0.0%
-10.0%
MCD,
-11.9%
-20.0%
McDonalds’ share price recovery of 8% in 2008 when the
S&P500 lost close to 40% indicates the defensive nature of stock. Even though, McDonalds’ is
currently at YTD loss of -12%, in the long run McDonald’s has the highest return in the quick
service restaurant industry with a 5 year cumulative return of 62%. I believe the rapid
expansion in emerging markets like China and India will lead to higher growth in the immediate
future due to McDonald’s ability to cater to the local taste and the huge population with higher
spending power.
The early performance indicators of the entry into
the premium coffee business is positive and it poses the main upside potential along with the
positive growth rate results in the emerging markets. New products like the $4 Angus burger
(introduced July 2009) may shift customers cutting expenses from the full service to
McDonald’s in the quick service industry. Expansion in the emerging markets, with 190 new
outlets in India and 500 in China over the next year could boost revenues. A potential weak
dollar can boost revenues as over 65% of McDonald’s revenues are from outside the United
States. The profitability of McDonald’s depends on efficient operations, effective marketing,
and its ability to provide fast service.
Risk Assessment:
McDonald’s faces risk at multiple levels of operation and
execution. At a high level, the key risks are: regulation and litigations, product development
and execution, costs (labor cost in a highly labor intensive industry and volatile commodity
prices), safety (ability to manage the potential impact from food-borne illnesses), global
markets (political instability, social and ethnic unrest), the economy and with close to 65% of
McDonald’s revenue from outside the U.S., fluctuations in currency exchange rate pose
significant risk.
Financial Data
Brand
(strong)
Management
(strong)
5
4
3
2
1
0
Under Valued
(no)
Risk
(medium)
Growth
(medium)
Financial
Health
(strong)
Revenues ($bn)
Operating Margin (%)
Net Income ($Million)
EPS ($)
Dividend/Share ($)
Cash/Share ($)
Share Data
52 week range
Performance (%)
MCD
YUM! Brands
S&P 500
FY
2008
$23.5
27.5%
$4,313
$3.76
$2.0
$1.79
FY
2009E
$23.8
29.3%
$4,573
$3.99
$2.0
$1.72
FY
2010E
$24.7
28.7%
$4,660
$4.07
$2.0
$1.69
$45.79 to $67.00
YTD 5 Year
1/08-8/09
-11.4%
62.0%
-5.0%
11.2%
55.6% Page | 1-9.5%
6.0% -16.1%
-30.0%
McDonald’s Corporation
Table of Contents
Company Overview ....................................................................................................................................................4
Demand Drivers..................................................................................................................................................4
McDonalds- A good defensive stock..................................................................................................................5
Key Success Factors ...........................................................................................................................................5
Industry Analysis ........................................................................................................................................................6
Top Industry Trends ...........................................................................................................................................6
Porters 5 Force Analysis .....................................................................................................................................7
Industry Valuation ..............................................................................................................................................7
Competitive Landscape ..............................................................................................................................................8
Macroeconomic Analysis ........................................................................................................................................ 10
Revenue, Operating Cost, Net Income and EPS Projections................................................................................... 12
Revenue Projections ........................................................................................................................................ 12
Operating Cost Projections .............................................................................................................................. 13
Revenue and EPS historical performance relative to Restaurant Industry and Sector .................................... 13
Net Income and EPS Projections ..................................................................................................................... 14
DCF Valuation ........................................................................................................................................................ 15
DCF Sensitivity Analysis ................................................................................................................................ 15
Absolute Valuation .................................................................................................................................................. 16
Financial Analysis ................................................................................................................................................... 17
Profitability Ratios Analysis............................................................................................................................ 17
Effective Ratios Analysis ................................................................................................................................ 17
Liquidity Ratios Analysis ................................................................................................................................ 18
Risks ........................................................................................................................................................................ 18
Conclusion ............................................................................................................................................................... 19
Appendix ................................................................................................................................................................. 20
Appendix 1: Revenue Projections by Revenue Source and by Geography ..................................................... 20
Appendix 2: Capital Expenditure and Depreciation/Amortization Projections............................................... 20
Appendix 3: Cost/Expense Projections by Revenue Source and by Geography ............................................. 21
Appendix 4: Net Income Statement Historical Trend and Projections............................................................ 22
Appendix 5: DCF Valuation ............................................................................................................................ 23
Page | 2
McDonald’s Corporation
List of Figures
Figure 1: Revenue by Region………………………………………………………………………………………..4
Figure 2: System wide Restaurants by Ownership trend……………………………………………………………4
Figure 3: Cumulative 5 year Restaurant Growth……………………………………………………………………5
Figure 4: 2009 U.S. Restaurant Industry Sales by Segment………………………………………………………...6
Figure 5: U.S. Restaurant Industry Sales……………………………………………………………………………6
Figure 6: Porter’s Five Forces……………………………………………………………………………………….7
Figure 7: Top 30 Quick Service Restaurants - by % Sales Change ………………………………………………...8
Figure 8: U.S. GDP Breakdown …………………………………………………………………………………...10
Figure 9: Personal Consumption Breakdown……………………………………………………………………...10
Figure 10: Non Durable Goods Breakdown ……………………………………………………………………….10
Figure 11: Food consumption Breakdown ………………………………………………………………………...10
Figure 12: Regression Consumer Spending & McDonalds………………………………………………………..11
Figure 13: Regression Disposable Income & McDonalds…………………………………………………………11
Figure 14: Regression Unemployment & McDonalds……………………………………………………………..11
Figure 15: Net Income Projections…………………………………………………………………………...……14
Figure 16: EPS Projections………………………………………………………………………………………...14
List of Tables
Table 1: U.S. Restaurant Industry Key Statistics……………………………………………………………………6
Table 2: Restaurant Industry Valuation……………………………………………………………………………..7
Table 3: McDonald’s Vs Peer Competition Stock Performance - YTD, 1 Year and 5 Year ……………………….8
Table 4: McDonald’s Corporation Vs Key Competition Key Financial Statistics………………………………….9
Table 5: McDonald’s Corporation Revenue Projections…………………………………………………………..12
Table 6: McDonald’s Corporation Operating Cost Projections……………………………………………………13
Table 7: McDonald’s Corporation Revenue and EPS performance relative to Industry and Sector………………14
Table 8: DCF Valuation Results…………………………………………………………………………………...15
Table 9: DCF Sensitivity Analysis ………………………………………………………………………………...15
Table 10: Absolute Valuation Matrix……………………………………………………………………………...16
Table 11: Profitability Ratio Analysis……………………………………………………………………………...17
Table 12: Effectiveness Ratio Analysis……………………………………………………………………………17
Table 13: Liquidity Ratio Analysis……………...…………………………………………………………………18
Page | 3
McDonald’s Corporation
Company Overview 1
McDonald’s Corporation (www.mcdonalds.com) was founded in 1948 and is currently based in Oak Brook,
Illinois. McDonald’s franchises and operates restaurants in the food service industry (both counter service and
drive through services). All restaurants are operated either by the company or franchisees, including conventional
franchisees under franchise arrangements, and foreign affiliate markets and development licensees under license
agreements. As of March 31, 2009, out of the 32,060 restaurants in 118 countries, 25,578 were operated by
franchisees (18,487 operated by conventional franchisees, 2,957 operated by developmental licensees and 4,134
operated by foreign affiliated markets) and 6,482 were operated by the company.
McDonald’s revenue consists of sales by company operated restaurants and fees (rent, royalties and percentage of
sales) from restaurants operated by franchisees and licensees. Under conventional franchise arrangement, the
franchisee provides a portion of the capital required for equipment, signs, seating, and reinvesting in the business
over time. The company owns the land and building or secures long term leases. Under developmental license
arrangement, the licensee provides capital for the entire business, including real estate. McDonald’s has no capital
invested. McDonald’s has equity investment in a number of foreign affiliates.
Figure 1: Revenue by Region ($23.5Bn in 2008)
APMEA
18%
Europe
42%
McDonald’s
benefits from
global
United
diversification
States
, with close to
34%
65% revenue
from outside
the U.S.,
however it
also faces risk
Other due to
6% exchange rate
volatility
Source: 10K company report - 2008
Figure 2: System wide Restaurants by Ownership trend
2003 2004 2005 2006 2007 2008
30,000
25,000
20,000
15,000
10,000
5,000
Company-operated restaurants
In 2007,
McDonald’s
set a 3 year
target to
refranchise
1000 to 1500
existing
company
owned
restaurants
between 2008
and 2010
Franchised restaurants
Source: 10K company report - 2008
Demand Drivers
Typical customers are young men, 18 to 35 years of age, as they tend to cook infrequently and eat larger meals.
The average check at a true fast food restaurant is $3 to $4 according to National Restaurant Association. The
average check at a fast casual restaurant is closer to $8. McDonald’s customer relevance in the U.S. is attributed
by their menu and prices, choices and variety, and customer service. Globally, McDonald’s caters and adapts to
different cultures and societies, while still providing them with the same McDonald’s experience. With a
significant portion of McDonalds sales derived from international stores, foreign denominated sales should
generate additional earnings leverage given the weakening of the US dollar against other currencies.
1
http://www.aboutmcdonalds.com/mcd/investors.html
Page | 4
McDonald’s Corporation
Figure 3: Cumulative 5 year Restaurant Growth
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
United
States
Europe
APMEA
Source: 10K company report - 2008
McDonald’s
in recent
years is
focusing its
attention in
growing its
business
outside the
U.S.
especially
emerging
markets of
China and
India
McDonald’s is a mature company. As its key
United States markets reach saturation levels,
McDonald’s has shifted its focus to the
international markets as a source of growth.
With a massive population of increasingly
affluent customers, China and India have
become key markets. The cumulative 5 year
restaurant growth rates (net increase in the
number of restaurants) in Asian Pacific,
Middle East and Africa (APMEA) are more
than 4 times than the restaurant growth rates
in the United States. McDonald’s adapts to
local preference by changing menus,
ingredients and operating procedures.
McDonalds- A good defensive stock
 A regression analysis between the excess McDonald’s return and S&P 500 (market) excess return for the last
30 years results in an R-Square of 0.29 - a low correlation indicating non-cyclical behavior.
 Even though many stocks had a tough time in 2008, McDonald’s was actually up about 8% last year, while
the S&P 500 was down close to 40%.
 McDonald’s corporation being a fast food restaurant is therefore a “cheaper alternative” for consumers who
may cut back spending on higher-end restaurants and may turn to cheaper alternatives during economic
downturns.
Key Success Factors
The key success factors for McDonald’s operating in the quick-service restaurant industry are:
 Cost efficiency: Ability to maintain price points are important and therefore, with rising labor costs
(especially in a high labor intensive industry) and managing volatile commodity prices are important.
 Product development, Marketing and promotions: Ability to introduce new products that keeps increasing
customer footprint is important - marketing and promotions help towards this effort.
 Currency exchange management: With close to 65% of its revenue from outside the U.S., McDonald’s is
subject to risk arising from fluctuating currency rates - hence a necessity to control this factor.
 Brand Management: Ability to react to new regulations, litigation and any new nutritional factors will
impact McDonald’s brand.
 Value menu and happy meals for Kids: Ability to hold price points and run effective promotions in this
segment is a key to driving sales and increase customer footprint.
 International expansion towards profitability: Ability to develop menu’s that cater to the local taste and
compete with low cost local competitors will determine profitability in emerging markets like India and
China.
Page | 5
McDonald’s Corporation
Industry Analysis
Figure 4: 2009 U.S. Restaurant Industry Sales by
Segment ($565.9 Billion of current dollars)
Industry: Restaurants
Sub-Industry: Quick Service Restaurants
The restaurant industry includes companies that own,
operate, and/or franchise dining establishments. The
restaurant industry is made up of the “quick service
restaurant” segment and the “full service restaurant”
segment. McDonald’s is a quick service restaurant;
however, the quick service restaurant industry and the
full service restaurant are substitutes and thereby
compete with each other. The quick-service restaurant
segment accounts for more than a third of the total
dining industry.
Quick
Service
Restaurant
33%
Full Service
Restaurant
67%
Source: www.hoovers.com
The restaurant business is relatively defensive during
economic downturns because dining out is one of the
last areas of expenditure consumers cut back on. During the economic slowdown from 2001-2003, consumer
spending on food away from home only dropped for one year and quickly hit a new all-time high in 2004 2
Top Industry Trends
Steady Sales Growth: Increase in consumer spending on food away from home has driven steady sales growth in
the quick service industry. In the last decade, fast food sales grew at an average annual rate of about 5% 3, while
sales have been strong, the expansion of new restaurants has been limited. Chains are focusing on improving or
closing struggling locations versus opening new restaurants. Quick-service restaurants may not suffer as much as
the full-service restaurant, because consumers cutting down on eating outside may most likely trade down to
cheaper options rather than fully cutting down on eating out.
Figure 5: U.S. Restaurant Industry Sales
(Billions of current dollars)
Table 1: U.S. Restaurant Industry Key Statistics
(Billions of current dollars)
565.9
600.0
500.0
379.0
400.0
300.0
239.3
200.0
100.0
119.6
0.0
1980
1990
2000
Source: National Restaurant Association
2
3
2009*
4%
Overall economic impact of the
restaurant industry
$1.5 trillion
Restaurant industry - Total
employment
13 million
(9% of U.S.
workforce)
91%
Percentage of Restaurants with less
than 50 employees
42.8
1970
Restaurant industry sales as a
percentage of U.S. GDP
Average industry sale per day
$1.5 billion
Source: National Restaurant Association
www.streetauthority.com
www.hoover.com
Page | 6
McDonald’s Corporation
Top Industry Trends (continued)
Positive Demographic Trends: Per capita spending on fast food is projected to rise 6 percent between 2000 and
2020, according to the USDA, primarily due to rising incomes and changing household structure. Projected
increases in personal income and smaller households outweigh the effect of the aging population, which favor
spending in full service restaurants. Cooking at home is less economical for households, making fast food an
attractive value. In addition, the number of hours the primary household manager works influences fast food
spending, and time-starved consumers will continue to look for convenient, economical meal solutions.
Food quality/Healthy eating: In a recent survey by the National Restaurant Association, 76% of adults said that
they were trying to eat healthier now at a restaurant than they did 2 years ago.
International Expansion/Growth: As key US markets reach saturation levels for large chains, companies look
to international markets as a source of growth. With a massive population of increasingly affluent customers,
China has become a key market. Companies change menus, ingredients, and operating procedures to adapt to
foreign preferences.
Porters 5 Force Analysis
Figure 6: Porters 5 force Industry Analysis
Supplier Power: Medium
Barrier to Entry:
Low
Rivalry:
High
Threat of
Substitutes: High
Buyer Power: High
Overall Take: Unattractive, with high competition
The restaurant industry’s is highly competitive with
intense rivalry.
The Buyer power is high as the consumer has many
choices with no switching costs.
The supplier power can vary, being low for restaurant
chain where procurement is consolidated and high for
family owned restaurants.
The threat of substitution is high, with options ranging
from different types of restaurants to eating at home
The Barrier to Entry is low, as starting a restaurant
requires relatively low capital requirements, however,
establishing a brand loyalty can take time.
Industry Valuation
Table 2: Restaurant Industry Valuation
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
23.8
21.4
5.7
2.5
15.4
High
1.5
1.4
3.3
2.5
1.6
Low
14.2
13.8
3.5
1.6
9.7
Low
1.0
0.96
1.1
1.6
1.0
Source: Thompson Baseline
Median
20.7
19.2
4.7
2.0
12.5
Median
1.3
1.2
1.7
2.0
1.2
Current
16.2
15.0
5.5
1.9
11.4
Current
1.1
0.96
2.6
1.9
1.4
The restaurant industry’s median ratios indicate the
restaurant industry is on the expensive side.
However, it does not mean that it’s a bad investment;
in this case the restaurant industry’s earnings are
growing at a faster rate than the market. Additional
research indicates that the restaurant industry benefits
from consumer behavior that eating out is the one of
the last areas where the consumer reduces spending in
order to increase their saving.
Page | 7
McDonald’s Corporation
Competitive Landscape
The fast food and quick service restaurant industry includes about 200,000 restaurants with combined annual
revenue of about $120 billion. The industry is highly fragmented with the top 50 companies holding about 25%
of the industry sales 4. The demographics and personal income drive demand and the profitability of individual
companies depends on efficient operations, effective marketing, and ability to provide fast service. Large
companies have advantages in purchasing, financing and marketing. Small companies can compete by offering
unique products or serving a local market. The industry is a highly labor intensive, the average annual revenue
per worker is just under $40,000. Fast food restaurants also compete with companies that offer meals or prepared
foods, including full service restaurants, supermarkets, delis, convenience stores, snack shops and cafeterias
Primary competitors in the fast food/quick service industry include: Wendy’s Arby’s Group Inc. (WEN), Burger
King Holdings Inc. (BKC), Yum! Brands Inc. (YUM), CKE Restaurants Inc. (CKR), Jack in the Box (JACK),
Starbucks Corporation (SBUX), Other Restaurant and Fast Food Restaurants.
Table 3: McDonald’s Vs Peer Competition Stock Performance - YTD, 1 Year and 5 Year
Company (Ticker)
Starbucks
(SBUX)
Bob Evans
(BOBE)
Yum! Brands
(YUM)
CKE Restaurants
(CKR )
Jack in the Box
(JACK)
McDonald’s
(MCD)
Burger King
(BKC)
YTD
Stock
Return
99.6%
39.1%
11.0%
1.5%
-7.4%
-12.5%
-23.1%
Company (Ticker)
Starbucks
(SBUX)
Yum! Brands
(YUM)
Bob Evans
(BOBE)
McDonald’s
(MCD)
Jack in the Box
(JACK)
CKE Restaurants
(CKR )
Burger King
(BKC)
1 Year
Stock
Return
22.5%
-1.6%
-10.3%
-10.5%
-11.6%
-30.5%
-32.3%
Company (Ticker)
McDonald’s
(MCD)
Yum! Brands
(YUM)
Jack in the Box
(JACK)
Bob Evans
(BOBE)
Burger King
(BKC)
CKE Restaurants
(CKR )
Starbucks
(SBUX)
5 Year
Stock
Return
61.8%
55.6%
13.1%
2.4%
-7.8%
-47.3%
-47.3%
Source: Yahoo! Finance www.finance.yahoo.com
It is evident from the above returns that even though McDonald’s returns are poor YTD, in the long term
McDonald’s has done really well, and also has a strong dividend 3.63% ($2) annual yield.
4
http://premium.hoovers.com/subscribe/ind/fr/profile/basic.xhtml?ID=269
Page | 8
McDonald’s Corporation
The table below summarizes how McDonald’s Corporation compares to companies in the Restaurant Industry
Table 4: McDonald’s Corporation Vs Key Competition Key Financial Statistics
Past 5
Current Projected
Current Previous
Company
Previous
year EPS
Current
Fiscal Fiscal Year
Fiscal Year Fiscal Year
growth
Fiscal
Projected
Projected Year EPS
Revenue
(%)
Year P/E
EPS
Revenue
($
millions) ($ millions)
McDonalds
$23,522
$23,826
$3.76
$3.99
15.0
26.1
Corporation (1)
Yum!
$11,279
$10,972
$1.96
$2.13
17.2
14.2
Brands (2)
CKE
$1,483
$1,465
$0.69
$0.84
10.8
NA
Restaurants (2)
Papa John’s
$1,132
$1,097
$1.30
$1.48
18.3
8.9
International (2)
Jack in
$2,540
$2,482
$1.99
$2.13
10.2
16.0
the Box (2)
Bob Evans
$1,751
$1,780
($0.17)
$2.23
10.2
16.0
Farms (2)
(1) McDonald’s projections based on Segment/Income Statement projection analysis (Appendix 4)
(2) Competitor data from Baseline/Reuters research data
Projected
3 Year
EPS
growth
(%)
13.03
11.7
11.3
10.7
12.5
12.5
Source: Reuters Research Data, Thompson Baseline and SIM Analyst Projections
Figure 7: Top 30 Quick Service Restaurants - by % Sales Change (Fiscal Year 2008)
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
McDonald's
Rank: 25
5.00%
0.00%
McDonald’s Corporation
Source: Quick Service Restaurant Magazine: http://www.qsrmagazine.com/
Page | 9
McDonald’s Corporation
Macroeconomic Analysis
The total U.S. GDP is about $14.3 trillion. 70% ($10 trillion) of it is personal consumption. The food industry
makes up a sizable portion of the GDP at $1.4 trillion, about 9.6% of the GDP. The restaurant industry’s share is
currently at $0.57 trillion, about 4% of the U.S. GDP.
The breakdown, from the U.S. GDP, to personal consumption, to non-durable goods, to food expenditure,
to restaurants expenditure is illustrated below:
Figure 8: U.S. GDP Breakdown
(in trillions $ and % of GDP)
Figure 9: Personal Consumption Breakdown
(in trillions $ and % of Personal Consumption)
Personal Consumption
Other
Durable Goods
Non Durable Goods
Services
$0.96
, 10%
$4.29
, 30%
$2.80
, 28%
$10.01
, 70%
$6.25
, 62%
Non Durable Goods:
19.6% of GDP
Source: US Bureau of Economic Analysis
Figure 10: Non Durable Goods Breakdown
(in trillions $ and % of Non Durable Goods)
Food
Clothing & Shoes
Gasoline, other energy
Other, non durable
$0.79
, 28%
Figure 11: Food consumption Breakdown
(in trillions $ and % of Food Consumption)
Restaurant - Food
Non-Restaurant - Food
$0.57
, 41%
$1.38
, 49%
$0.81
, 59%
$0.27
, 10%
$0.37
, 13%
Source: US Bureau of Economic Analysis
Food: 9.7% of
GDP
Source: US Bureau of Economic Analysis
Restaurants:
4% of GDP
Source: US Bureau of Economic Analysis
Page | 10
McDonald’s Corporation
The key macroeconomic factors that affect the restaurant industry are: unemployment rate, discretionary income,
personal saving rate, and consumer spending and confidence. The restaurant industry has been impacted
negatively by the rising unemployment rate, decrease in discretionary income, consumer spending & confidence
and increase in personal saving rate.
Even though McDonald’s competes in the restaurant industry, it is important to note the follow two points:
 McDonald’s operates in the quick-service/fast food restaurant segment and therefore is less affected by
the above macro economical factors as consumers cut down their spending from eating at full-service
restaurants and look for cheaper options in quick-service restaurants like McDonald’s.
 Research has shown that restaurant industry as a whole is relatively defensive during economic downturns
because dining out is one of the last areas of expenditures consumers cut back on. 5
Therefore, it will be interesting to see the impact of the key macro economical factors on McDonald’s as its one
of the biggest quick-service restaurants rather than the restaurant industry as a whole.
Figure 12: Regression Consumer Spending & McDonalds Figure 13: Regression Disposable Income & McDonalds
Consumer Spending
Disposable Income
McDonalds
10.0
80.0
60.0
5.0
10.0
80.0
60.0
5.0
40.0
40.0
0.0
-5.0
20.0
R = -0.65
0.0
Figure 14: Regression Unemployment & McDonalds
80.0
8.0
60.0
40.0
4.0
20.0
2.0
0.0
R = 0.34
Source: Thompson Baseline
5
MCD
10.0
6.0
0.0
R = -0.48
-5.0
20.0
0.0
Source: Thompson Baseline
Source: Thompson Baseline
Unemployment Rate
MCD
0.0
McDonald’s Corporation is clearly a good defensive stock. It
is also interesting to note from the regressions that when
consumer spending and disposable income increase or are
relatively steady, the stock price of McDonalds goes up
relatively faster. However, when consumer spending and
disposable income fall then the stock price of McDonalds
remains relatively stable. Similar conclusion can be made
regarding unemployment rate. This analysis further
substantiates the point that dining out is one of the last
areas of expenditures that consumers cut back on and
consumers switch from full service to quick service to reduce
costs.
www.streetauthority.com
Page | 11
McDonald’s Corporation
Revenue, Operating Cost, Net Income and EPS Projections
Revenue Projections
The overall revenue growth, across all segments for 2009 is projected to grow by 1.11%. The key factors and
assumptions considered for revenue projections by geography are:
United States:






Refranchising strategy of converting company owned to franchisees, reimaging and new restaurants
Premium coffee sales
New products like the Angus burger (introduced 7/2/20s09).
Lower consumer spending and higher unemployment rates (9.5% overall and ¼ teenagers).
Poorer global economy and impact of local market conditions.
Loss of NBA contract (second quarter 2009)
Europe:




Refranchising strategy of converting company owned to franchisees and reimaging
200 new McCafes primarily in Germany and France.
Increase total locations offering extended and 24-hour service.
Poorer global economy and impact of local market conditions
APMEA:
 Expansion, more new restaurants in India (250) and China (500).
 Locally relevant strategy and breakfast business.
 Growth rate will slower than expected in China relative to previous years due to recent lower spending trends.
Table 5: McDonald’s Corporation Revenue Projections
McDonald's Corporation Total
Revenues ($ millions)
United States
(% increase)
Europe
(% increase)
APMEA
(% increase)
Other
(% increase)
Total Revenues
Projection
FY
FY
FY
2012
2011
2010
9,275
8,714
8,344
6.4%
4.4%
2.9%
11,935 11,051 10,425
8.0%
6.0%
3.8%
5,457
4,961
4,593
10.0%
8.0%
5.4%
1,550
1,437
1,357
7.9%
5.8%
3.8%
FY
FY
2009
2008
8,112
8,078
0.4%
2.2%
10,047
9,923
1.3%
11.2%
4,358
4,231
3.0%
17.6%
1,308
1,290
1.4% (45.2%)
FY
2007
7,906
5.9%
8,926
16.9%
3,599
17.9%
2,356
(14%)
Actuals
FY
2006
7,464
7.3%
7,638
8.0%
3,053
8.5%
2,740
20.6%
FY
2005
6,955
6.6%
7,072
5.0%
2,815
3.5%
2,275
19.4%
FY
2004
6,525
28,217 26,162
23,826
22,787
20,895
19,117
17,889
Consensus
NA 24,126
24,720
23,522
6,737
2,721
1,906
23,630 22,570
Source: 10K reports and SIM Analyst
Page | 12
McDonald’s Corporation
Operating Cost Projections
The overall operating expense for company operated restaurant is projected at 82.5%, for franchised restaurants at
17.7% and SG&A at 10%. The key factors and assumptions are considered are:
 With about 75% of McDonald’s grocery bill comprised of 10 different commodities, a basket of goods
approach is the most comprehensive way to look at the Company’s commodity costs. For the full year 2009,
the total basket of goods is expected to rise about 5% to 5.5% in the U.S.
 Restaurant industry is highly labor intensive and the minimum wage to increase to $7.30 July 1, 2009
 The last 3 years for a company operated restaurant: Food expense: 40%, Payroll/Employee Benefit: 31% and
Occupancy & Other costs: 29%. Assuming the food cost increases by 5.5%, labor cost by 1% (as most state
minimum wages are close to or higher than federal minimum wage), the overall cost increase is 2.6%, which
is 80.07% of sales. We took the larger of (80.07% or 81.5%-Last years)
 In FY2009, Selling, General & Administrative expenses is expected to decline by 1%, due to certain items in
2008 such as the biennial Worldwide Owner/Operator Convention and the Beijing Summer Olympics.
Table 6: McDonald’s Corporation Operating Cost Projections
McDonald's Corporation Total
Operating Costs ($ millions)
FY
2012
Projection
FY
FY
2011
2010
FY
2009
FY
2008
Actuals
FY
FY
2007
2006
FY
2005
FY
2004
16,156
14,98
14,160
13,769
13,653
13,742
12,905
11,919
11,052
Franchisee Operated
1,532
1,422
1,344
1,277
1,230
1,140
1,058
1,021
1,002
SG&A
2,600
2,413
2,283
1,963
2,355
2,367
2,296
2,118
1,939
(55)
(51)
(167)
(161)
(159)
1,659
201
75
426
Company Operated
Others, net
Total Operating Cost
20,234
18,767
17,619
16,848
17,079
18,908
16,460
15,133
14,419
Source: 10K reports and SIM Analyst
Revenue and EPS historical performance relative to Restaurant Industry and Sector
McDonald’s Earnings Per Share and Revenue Growth trend and performance relative to the restaurant industry
and its sector is summarized below. The Revenue Growth long term trend and current trend are below the levels
of the restaurant industry and the sector. However, the Earnings Per Share growth trend are above the levels of
the industry and sector, except for the most recent quarter.
Page | 13
McDonald’s Corporation
Table 7: McDonald’s Corporation Revenue and EPS performance relative to Industry and Sector
Growth Rate %
EPS growth –
Recent Quarter
EPS growth Past
12 Month
EPS growth past
5 years
Revenue growth
– Recent Quarter
Revenue growth
Past 12 Months
Revenue growth
Past 5 years
McDonald’s
Restaurant
McDonald’s Vs
Corporation
Industry
Industry
(5.0)
9.2
Sector
McDonald’s Vs
Sector
(0.4)
0.8
(1.5)
(4.4)
26.1
22.9
12.8
(7.0)
(0.9)
(1.3)
(3.4)
0.7
(4.0)
6.5
10.3
15.4
Source: Thompson Baseline
Net Income and EPS Projections
The net income for fiscal year 2009 is forecasted to increase by 6% to $4,573 million and the EPS is forecasted to
increase by 6.1% to $3.99 against a consensus of $3.87 based on the revenue and operating cost projections
illustrated above. A detailed projections of net income is illustrated in Appendix 4
Figure 15: Net Income Projections
Figure 16: EPS Projections
6,000
5.00
5,000
4.00
4,000
3,000
3.00
2.00
1.00
2,000
-
1,000
EPS history and forecast ($)
Consensus
2012E* consensus not available
Source: 10K reports and SIM Analyst
Source: 10K reports, Thompson Baseline & SIM Analyst
Page | 14
McDonald’s Corporation
DCF Valuation
DCF methodology estimated a 1 year target price of $60.27 for McDonald. The DCF model assumes an
operating margin of 29% based on a 5 year historical data and future operating costs, a terminal FCF growth rate
of 4%, a discount rate of 10% and tax rate of 30%. A detailed summary of all assumptions are summarized in
above section and the revenue and cost projection for 2009 to 2012 by revenue sources (company operated sales
and franchise revenue) and by geography, and capital expenditure is summarized Appendix 1, 2 and 3. The
projected income statement and cash flow statements are summarized in Appendix 4 and 5 respectively.
Table 8: DCF Valuation Results
Terminal Value: $105,016 million
P/E: $15
EV/EBITDA: 9
Free Cash Yeild: 5.8%
Shares Outstanding: 1,146
Current Share Price: $55.08
NPV of Free Cash Flow: $28,586 million
NPV of Terminal Value: $40,488 million
Projected Equity Value: $69,074 million
Implied Equity Value per Share: $60.27
Upside (downside) to DCF: 9.4%
Source: DCF Valuation, Appendix 4
DCF Sensitivity Analysis
The DCF sensitivity table shown below shows the equity share price given different cash flow and WACC
assumptions. In the model, an increase in 0.5% in the terminal growth rate would increase the equity value per
share to $63.9, whereas an increase by 0.5% in the discount rate would reduce the equity value per share to $55.5.
Growth Rate
Table 9: DCF Sensitivity Analysis
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
8.0
68.3
72.4
77.4
83.5
91.2
101.0
114.0
132.4
159.8
8.5
62.8
66.2
70.2
75.0
80.9
88.2
97.7
110.3
127.9
9.0
58.0
60.9
64.1
68.0
72.6
78.3
85.4
94.5
106.6
Discount Rate
9.5
10.0
54.0
50.4
56.3
52.4
59.0
54.6
62.2
57.2
60.3
65.9
63.9
70.4
75.8
68.2
82.7
73.5
91.4
80.0
10.5
47.3
48.9
50.8
53.0
55.5
58.5
61.9
66.1
71.2
11.0
44.5
45.9
47.5
49.4
51.5
53.9
56.7
60.1
64.1
11.5
42.0
43.2
44.6
46.2
47.9
50.0
52.3
55.0
58.3
12.0
39.7
40.8
42.0
43.4
44.9
46.6
48.5
50.8
53.4
Source: SIM Analyst
Page | 15
McDonald’s Corporation
Absolute Valuation
In order to better evaluate McDonald’s, a valuation using various ratios and multiples is analyzed. The valuation
includes analysis of: Forward Price to Earnings, Price to Sales, Price to Book, Price to EBITDA and Price to Cash
Flow ratios. In the analysis the target multiple is projected to be closer to the median ratios as it is assumed that
the multiples will revert to the median given the current economic scenario and growth opportunities of
McDonalds. Also, the target earnings and sales per share are determined from Income Statement projections
(please see figure 12 and 13 for details), and the book, EBITDA and cash flow per share are determined by
dividing the current ratio by the current stock price and then taking their inverse.
The valuation results are summarized below.
Table 10: Absolute Valuation Matrix
High
Low
Median Current
Target
Multiple
Target
E, S, B,
etc/Share
Target
Price
Weight
14.9
16.1
3.99
$64.23
50%
Weighted
Average
Target
Price
$32.15
Forward
Price
Earnings
Ratio
Price Sales
Ratio
Price to
Book Ratio
19.5
13.6
16.1
3.2
1.8
2.5
2.7
2.5
20.79
$51.98
15%
$7.78
5.3
2.5
3.4
5.0
3.4
11.49
$39.07
5%
$1.95
Price to
EBITDA
Ratio
14.13
7.38
9.11
8.64
9.11
6.09
$55.48
15%
$8.32
Price to
Cash Flow
Ratio
15.8
9.6
12.4
12.3
12.4
4.70
$58.28
15%
$8.74
Weighted Average Valuation
$58.94
Source: Data from Thompson Baseline and Forecast by SIM Analyst
The weights are assigned based on importance of the ratio to the valuation going forward, hence the forward price
earnings ratio is given the most weight as it is forward looking. The methodology reveals a projected stock price
of $58.94 for McDonalds. This gives an upside of 8.1% given the current stock price of $54.50.
Based on the above two valuation models, the final 1-year target price is estimated to be $59.61 (average of the
DCF and Absolute Valuation), giving the stock at upside of 13.01% (9.4%capital gain+3.63% dividend yield).
Page | 16
McDonald’s Corporation
Financial Analysis
Ratio Analysis is used to dissect and analyze the financial performance of McDonald’s; the three areas analyzed
are profitability, effectiveness and liquidity. This includes analyzing the ratio trends of McDonald’s and the
company’s performance relative to the restaurant industry and the sector.
Profitability Ratios Analysis
Table 11: Profitability Ratio Analysis
Profitability
Ratios %
Gross Margin –
Past 12 months
Gross Margin –
Past 5 years
Operating Margin
– Past 12 months
Operating Margin
– Past 5 years
Net Margin –
Past 12 months
Net Margin –
Past 5 years
McDonald’s
Restaurant
McDonald’s Vs
Corporation
Industry
Industry
37.5
32.0
Sector
McDonald’s Vs
Sector
44.8
33.9
30.9
50.9
28.4
17.7
8.1
21.2
15.1
8.3
18.8
11.4
3.1
17.7
9.6
9.6
Source: Data from Thompson Baseline
McDonald’s has maintained healthy profitability ratios. Comparison of the past 5 years and past 12 months
numbers indicate that the trend is improving and McDonald’s performance is better when compared with the
restaurant industry and the sector.
Effective Ratios Analysis
Table 12: Effectiveness Ratio Analysis
Profitability
Ratios %
Return on Assets
– Past 12 months
Return on Assets
– Past 5 years
Return on Equity
– Past 12 months
Return on Equity
– Past 5 years
McDonald’s
Restaurant
McDonald’s Vs
Corporation
Industry
Industry
14.2
10.9
Sector
McDonald’s Vs
Sector
0.7
10.0
9.8
4.2
30.5
12.4
11.3
11.4
12.4
6.0
Source: Data from Thompson Baseline
Page | 17
McDonald’s Corporation
With respect to the effectiveness ratios, McDonalds is showing positive improvements with both the year over
year trends and relative to the restaurant industry and the sector as illustrated above.
Liquidity Ratios Analysis
Table 13: Effectiveness Ratio Analysis
Profitability
Ratios %
Quick Ratio
McDonald’s Restaurant
McDonald’s
Corporation Industry
Vs Industry
1.2
0.8
Sector
McDonald’s
Vs Sector
0.6
Current Ratio
1.3
1.1
1.0
Total Debt to
Equity
83.1
175.1
103.6
Source: Data from Thompson Baseline
Again, with respect to the effectiveness ratios, McDonalds is showing positive improvements with both the year
over year trends and relative to the restaurant industry and the sector.
Risks
McDonald’s faces risk at multiple levels of operation and execution. At a high level, the key risks are: Regulation
and Litigations, Product Development and Execution, Costs (labor and commodity) and Currency Exchange rate,
Safety, Global Markets and Economy.
Regulation and Litigation: The cost, compliance and other risks associated with the often conflicting
regulations, especially in the United States can adversely affect McDonald’s and can increase its exposure to
litigation or governmental investigations or proceedings. The impact of nutritional, health and other scientific
inquiries and conclusions, which constantly evolve and often have contradictory implications, but nonetheless
drive popular opinion, litigation and regulation in ways that could be material to McDonald’s
Product Development and Execution: Ability to roll-out new products and product line extensions based on
global and local market conditions is a risk that needs to managed and executed by McDonald’s
Costs (labor and commodity) and Currency Exchange Rates: The restaurant industry is highly labor
intensive, therefore rising labor cost, such as increase in minimum wage will have a negative impact.
McDonald’s ability to manage volatile commodity prices is also an important factor for risk management. With
close to 65% of revenue from outside the United States, McDonald’s is exposed to significant risks arising from
fluctuations in foreign currency exchange rates.
Safety: McDonald’s ability to manage the potential impact from food-borne illnesses or product safety issues is
an important risk management issue.
Page | 18
McDonald’s Corporation
Risks (continued)
Global Markets: The challenges and uncertainties associated with operating in developing markets, such as
China, Russia and India, which may entail a relatively higher risk of political instability, economic volatility,
crime, corruption and social and ethnic unrest pose significant risk as close to 65% of McDonald’s revenue is
from outside the U.S.
Economy: The impact of the current economic conditions on unemployment levels and consumer confidence,
particularly if conditions worsen, and the effect of initiatives to stimulate economic recovery and to stabilize or
further regulate financial markets will have an impact on the cost and availability of funding for the Company and
its franchisees. Inflation and foreign exchange rates also pose significant risks.
Conclusion
The final 1-year target price for McDonald’s Corporation is $59.61, with the stock trading at $54.50 on
August 17, 2009. This gives the stock an upside of 13.01%, which includes an annual dividend yield of
3.63% ($2.0).
Based on the above detailed company, industry, economic, financial and valuation analysis, I
recommend to HOLD the stock. Few key reasons are summarized below:
 Relatively good upside returns of 13.01%. Also, the DCF sensitivity analysis indicates higher
probability the stock price should range from $55.9 to $63.9
 Good annual dividend yield of 3.63% ($2.0 per stock)
 Good defensive stock, based on the economic analysis, if the economy deteriorates further then
the stock value should hold relatively stable, however, if the economy improves, the stock value
will go up.
 On target to beat analyst expectations this year and a projected 13%, 3-year increase in EPS,
highest in quick-service restaurant industry. Higher comparable sales for each month this fiscal
year (2009)
 Strong brand name and strong management
 Strong financial position relative to the restaurant Industry and the sector, along with a consistent
improvement trend in profitability, effectiveness and liquidity ratios
 Refranchising strategy (from company operated to franchisee) will improve profit margins
 A mature company with good growth prospects in emerging markets as its already well
established in international markets and currently in expansion mode
 Strong early signs emerging from the premium coffee business
 Ability to roll-out new products ($4 Angus Burger - latest introduction in July, 2009) will
continue to increase customer footprint
The main risk that may affect McDonald’s earnings is the fluctuations in exchange rate, with close to
65% of its revenue from outside the United States. However, with the high deficits facing the United
States, and with most popular opinions suggesting a weaker dollar moving forward, it should augment
the projected earnings of McDonald’s Corporation.
Page | 19
McDonald’s Corporation
Appendix
Appendix 1: Revenue Projections by Revenue Source and by Geography
McDonald's Corporation
Segments
($ millions)
Company Operated Sales
United States
Europe
APMEA
Other
Total Company Operated
Sales
Franchised Revenues
United States
Europe
APMEA
Other
Total Franchised Revenue
Total Revenues
United States
Europe
APMEA
Other
Total Revenues
Consensus
Projection
FY
2012
FY
2011
5,213
8,842
4,702
946
4,918
8,187
4,275
892
4,729
7,723
3,958
858
19,703
18,272
4,062
3,093
755
605
Actuals
FY
FY
2010
2009
REVENUE
FY
2008
FY
2007
FY
2006
FY
2005
FY
2004
4,636
7,498
3,770
841
4,636
7,424
3,660
841
4,682
6,817
3,134
1,978
4,410
5,885
2,674
2,433
4,098
5,465
2,453
2,002
3,828
5,174
2,390
1,663
17,268
16,745
16,561
16,611
15,402
14,018
13,055
3,796
2,864
686
545
3,615
2,702
635
500
3,476
2,549
588
467
3,442
2,499
571
449
3,224
2,109
465
378
3,054
1,753
379
307
2,857
1,607
362
273
2,697
1,563
331
243
8,514
7,891
7,452
7,080
6,961
6,176
5,493
5,099
4,834
9,275
11,935
5,457
1,550
8,714
11,051
4,961
1,437
8,344
10,425
4,593
1,357
8,112
10,047
4,358
1,308
8,078
9,923
4,231
1,290
7,906
8,926
3,599
2,356
7,464
7,638
3,053
2,740
6,955
7,072
2,815
2,275
6,525
6,737
2,721
1,906
28,217
NA
26,162
24,126
24,720
23,630
23,826
22,570
23,522
22,787
20,895
19,117
17,889
Appendix 2: Capital Expenditure and Depreciation/Amortization Projections
Projection
McDonald's Corporation
($ millions)
Actuals
FY
2012
FY
2011
FY
2010
FY
2009
FY
2008
FY
2007
FY
2006
FY
2005
FY
2004
% of Sale
2,300
8.2%
2,200
8.4%
2,100
8.5%
2,100
8.8%
2,100
8.9%
1,900
8.3%
1,600
7.7%
1,400
7.3%
1,300
7.3%
Depreciation/Amortization
% of Sale
1,411
5.0%
1,308
5.0%
1,236
5.0%
1,191
5.0%
1,208
5.1%
1,214
5.3%
1,250
6.0%
1,250
6.5%
1,201
6.7%
CAPX
Page | 20
McDonald’s Corporation
Appendix 3: Cost/Expense Projections by Revenue Source and by Geography
Projection
FY
FY
FY
FY
FY
2012
2011
2010
2009
2008
OPERATING COSTS AND EXPENSES
Actuals
FY
FY
2007
2006
FY
2005
FY
2004
4,250
7,246
3,856
804
4,010
6,709
3,505
758
3,856
6,329
3,246
729
3,780
6,145
3,129
715
3,780
6,084
3,076
713
3,806
5,612
2,663
1,661
3,567
4,925
2,333
2,080
3,330
4,648
2,186
1,755
3,097
4,367
2,126
1,462
16,156
14,983
14,160
13,769
13,653
13,742
12,905
11,919
11,052
691
680
79
82
645
630
72
74
615
594
67
68
591
561
62
63
575
534
60
61
555
461
55
69
541
396
46
75
531
372
48
70
520
368
47
67
Total Franchised Expenses
SG & A Expenses
United States
Europe
APMEA
Other
1,532
1,422
1,344
1,277
1,230
1,140
1,058
1,021
1,002
855
859
387
499
804
795
352
463
770
750
326
437
667
622
265
408
745
714
300
596
744
689
276
658
727
610
238
721
697
556
218
647
602
485
189
663
Total SG & A Expenses
Impairment and other charges
United States
Europe
APMEA
Other
2,600
2,413
2,283
1,963
2,355
2,367
2,296
2,118
1,939
7
-
7
-
6
-
6
-
6
-
(11)
1,681
62
48
24
4
(9)
(23)
80
26
139
36
7
7
6
6
6
1,670
134
(28)
281
(15)
(14)
(132)
(128)
(126)
(89)
(38)
(45)
(45)
(133)
(123)
(117)
(112)
(111)
(116)
(77)
(53)
(60)
86
80
76
73
72
194
182
201
250
McDonald's Corporation
Segments
($ millions)
Company Operated Restaurant
Cost
United States
Europe
APMEA
Other
Total Company Operated
Expenses
Franchised Restaurant Cost
United States
Europe
APMEA
Other
Total Impairment and other
charges
Other Operating (Income) /
Expenses, net
Gain on sales of business
Equity in earnings of
unconsolidated affilates
Asset disposition and other
expenses
Total Other Operating
(Income)/Expenses, net
(62)
(57)
(173)
(167)
(165)
(11)
67
103
145
Total Operating Cost and
Expenses
20,234
18,767
17,619
16,848
17,079
18,908
16,460
15,133
14,419
Page | 21
McDonald’s Corporation
Appendix 4: Net Income Statement Historical Trend and Projections
Projection
McDonald's Corporation
Income Statement
in millions except per share data
REVENUES
Actuals
FY
2012
FY
2011
FY
2010
FY
2009
FY
2008
FY
2007
FY
2006
FY
2005
FY
2004
Sales by Company Operated Restaurants
19,703
18,272
17,268
16,745
16,561
16,611
15,402
14,018
13,055
Revenues from franchised restaurants
8,514
7,891
7,452
7,080
6,961
6,176
5,493
5,099
4,834
Total Revenue
OPERATING COSTS/EXPENSES
28,217
26,162
24,720
23,826
23,522
22,787
20,895
19,117
17,889
Company operated restaurant expense
16,156
14,983
14,160
13,769
13,653
13,742
12,905
11,919
11,052
Franchised restaurants expenses
Selling, general & administrative
expenses
1,532
1,422
1,344
1,277
1,230
1,140
1,058
1,021
1,002
2,600
2,413
2,283
1,963
2,355
2,367
2,296
2,118
1,939
Impairment & other charges, net
7
7
6
6
6
1,670
134
(28)
281
Other operating income (expenses), net
(62)
(57)
(173)
(167)
(165)
(11)
67
103
145
20,234
18,767
17,619
16,848
17,079
18,908
16,460
15,133
14,419
Operating Income
7,983
7,396
7,101
6,978
6,443
3,879
4,435
3,984
3,470
Interest (Expense)
(523)
(523)
(523)
(523)
(523)
(410)
(402)
(356)
(358)
Nonoperating income (expense), net
78
78
78
78
78
103
123
32
21
Gain (loss) on sale of investment
Income from continuing Operations
before tax
-
-
-
-
160
-
-
-
7,538
6,951
6,656
6,533
6,158
3,572
3,660
3,133
Income Tax
2,261
2,085
1,997
1,960
1,845
1,237
1,288
1,083
855
Income from continuing Operations
Income from discontinued Operatioins,
net of taxes
5,277
4,866
4,660
4,573
4,313
2,335
2,868
2,578
2,278
-
-
-
-
-
60
678
25
1
Net Income
5,277
4,866
4,660
4,573
4,313
2,395
3,546
2,602
2,279
4.60
NA
4.25
4.6
4.07
4.26
3.99
3.87
3.83
3.76
3.67
2.02
1.98
2.87
2.83
2.06
2.04
1.81
1.79
1,146
2.00
1,146
2.00
1,146
2.00
1,146
2.00
1,127
1,146
1.63
1,188
1,212
1.50
1,234
1,252
1.00
1,260
1,274
0.67
1,260
1,274
0.55
Total operating costs and expenses
Earnings per share
Basic
Diluted
Consensus
Weighted average shares outstanding
Basic
Diluted
Dividend per common share
4,156
Page | 22
McDonald’s Corporation
Appendix 5: DCF Valuation
2004
Historical End of Year
2005
2006
2007
2016
2017
2018
17,889
19,117
20,895
22,787
23,522
23,826
24,720
26,162
28,217
29,345
30,519
31,740
33,010
34,330
35,703
% growth
rate
NA
6.9%
9.3%
9.1%
3.2%
1.3%
3.8%
5.8%
7.9%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
Operating
Income
3,470
3,984
4,435
3,879
6,443
6,978
7,101
7,396
7,983
8,510
8,851
9,205
9,573
9,956
10,354
Operating
Margin
19.4%
20.8%
21.2%
17.0%
27.4%
29.3%
28.7%
28.3%
28.3%
29.0%
29.0%
29.0%
29.0%
29.0%
29.0%
Interest and
Other- net
(336)
(299)
400
(247)
(285)
(445)
(445)
(445)
(445)
(293)
(305)
(317)
(330)
(343)
(357)
Interest % of
Sales
-1.9%
-1.6%
1.9%
-1.1%
-1.2%
-1.9%
-1.8%
-1.7%
-1.6%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
855
1,083
1,288
1,237
1,845
1,960
1,997
2,085
2,261
2,465
2,564
2,666
2,773
2,884
2,999
Tax Rate
27%
30%
31%
35%
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
Net Income
2,279
2,602
3,546
2,395
4,313
4,573
4,660
4,866
5,277
5,752
5,982
6,221
6,470
6,729
6,998
NA
14%
36%
-32%
80%
6%
2%
4%
8%
9%
4.0%
4.0%
4.0%
4.0%
4.0%
Add
Depreciation
1,201
1,250
1,250
1,214
1,208
1,191
1,236
1,308
1,411
1,467
1,526
1,587
1,650
1,717
1,785
% of Sales
6.7%
6.5%
6.0%
5.3%
5.1%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
(89)
412
(5)
(16)
(26)
(37)
(38)
(40)
(41)
(43)
(45)
(47)
% of Sales
-0.5%
2.2%
-0.8%
-0.2%
1.0%
0.0%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
Subtract
Cap Ex
1,300
1,400
1,600
1,900
2,100
2,100
2,100
2,200
2,300
2,201
2,289
2,381
2,476
2,575
2,678
Capex % of
sales
7.3%
7.3%
7.7%
8.3%
8.9%
8.8%
8.5%
8.4%
8.2%
7.5%
7.5%
7.5%
7.5%
7.5%
7.5%
Free Cash
Flow
2,091
2,865
3,033
3,667
3,659
3,779
3,948
4,350
4,980
5,179
5,386
5,602
5,826
6,059
37.0%
5.9%
1,673
44.8%
119.2%
-0.2%
3.3%
4.5%
10.2%
14.5%
4.0%
4.0%
4.0%
4.0%
4.0%
% Growth
Plus/(minus)
Changes
WC
YOY growth
Terminal Discount Rate
Terminal FCF Rate
Terminal Value
P/E
Shares Outstanding
Total Debt
Total Cash
EV/EBITDA
Free Cash Yield
Cash/Share
Current Share Price
NPV of Free Cash Flow
NPV of Terminal Value
Projected Equity Value
Implied Equity Value/Share
Upside (downside) to DCF
(163)
(36)
2009
2010
2011
Projected Year Ending
2012
2013
2014
2015
Revenue
Taxes
2008
246
10.0%
4.0%
$105,016 million
15.0
$1,146 million
$10,446 million
$1,980 million
9
5.8%
$1.73
$55.08
$28,586 million
$40,488 million
$69,074 million
$60.27
9.4%
Page | 23