McDonald`s Corp. (MCD)

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McDonald’s Corp. (MCD) NYSE
Patrick O’Donnell & Matthew Rasinski
Thursday, April 11, 2013
Agenda
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Introduction
Company Overview
Current Events
Industry Overview
Stock Performance
Financial Analysis
Valuation
Recommendation
Introduction
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McDonald’s was founded in 1940 by Richard and
Maurice McDonald in San Bernardino, California
It is the largest chain of hamburger fast fast food
restaurants, serving 68 million customers daily in
119 countries
Ray Kroc purchased a franchise in 1955 and shorty
after purchased the entire chain from the McDonald
brothers
Headquarters – Oak Brook, Illinois, U.S.
Company Overview
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McDonalds operates over 34,000 restaurants
worldwide
Employ over 1.7 million people
Notable for their 25 year consecutive dividend
increase to shareholders – S&P 500 Dividend
Aristocrats
More recently spun-off Chipotle Mexican Grill,
Donatos Pizza, and Boston Market among others
Sector: Services, Industry: Restaurants
Global Operations
Wikimedia Commons
Current Events
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Management has shifted gears by catering to young
adults rather then the family friendly market segment
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Super Size Me Legislation – restriction by Congress
currently being debated pertaining to calorie intake
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No more play pens, baby seats, etc.
Drink size, burger, and fry reductions and reconfigurations
McDonalds are recently combating this negative press
by including a healthy option
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Fruit smoothies, yogurt, salad, whole vegetables and fruits
New York Ban on Super-Sized Drinks
washingtonexaminer.com
Declining Soft Drink Sales
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The overall trend for
soft drinks is steadily
declining
This is bad news for
fast food restaurants
considering drink
sales are the most
profitable segment
on the menu
dividendbuddy.com
Labor Strikes
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New York labor
strikes on fast food
chains are causing
serious problems
High probability
that minimum wages
will rise in New
York and across the
nation
CNN Money
Equity Snapshot
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Stock Price:
$101.42
Beta: .34
5 Year PEG
Ratio: 1.87
TTM P/E: 17.58
Forward P/E:
17.57
Div. Yield: 3%
Industry Overview
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McDonalds is far larger company then all its
competitors in terms of sales and market cap
McDonald's Market Share
Stock Performance
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McDonald’s performance from the purchase date of
2008 has a total yield of 96%, done handsomely
as compared to its competitors
Porter’s 5 Forces
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Bargaining Power of Buyers: High
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Bargaining Power of Suppliers: Low
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Alternatives such as 1-minute meals, healthy living, are all driving forces
that compete with the consumers’ wallet
Competitive Rivalry: High
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Low quality food items are a commodity
Threat of New Substitutes: Moderate
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Many fast food chains to choose from both domestically and
internationally
Industry competes heavily with one another in terms of price and market
share
Threat of New Entrants: Moderate
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Emerging players may come from all walks of life, primary limiting
factors are brick and mortar costs
How Does MCD Make Money?
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Company Operated Stores (40% total revenue)
Franchise Revenue (60% total revenue)
 US
(44% of total revenue)
 Europe (24% of total revenue)
 Asia/Pacific, Middle East, Africa (20% of total
revenue)
 Other (12% of total revenue)
Is the Money Growing?
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US Sales
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Europe
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Growth 2.4%
Customer Growth (-.5%)
APMEA
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Growth 3.3%
Customer Growth (1.9%)
Growth 1.4%
Customer Growth (2.2%)
Other
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Growth 7.7%
Customer Growth (3%)
How does McDonalds make money?
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Focus on balancing core menu classics with new products
and promotional food events, such as Chicken McBites,
Blueberry Banana Nut Oatmeal, and additional
McCafe beverage offerings.
New product introductions were among the largest
drivers of revenue growth in 2010 and 2011 (Note:
These items had significantly high profit margins)
Target Customers: Medium Income Households (who
spend roughly 40% of their food budget on dinning
out) and 18 to 25 year olds (who spend nearly 46.4 of
their food budget on dinning out)
The Good, The Bad, The Questionable
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The Good: APMEA geographic segment growth of
17.0%
The Bad: “Dollar Menu” incentives are not bringing
in the growth the in sales as the company had relied
on in the past.
The Questionable: “Angus” products are attempting
to increase the quality of McDonalds products,
however the lack of profit margin may cause the
product to be abandon.
Financial Projections
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See Excel Model
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Concerns:
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Discount Rate
High ROE
Previous Valuation Errors
RCMP
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December 2008 Valuation: $49.63
March 2009 Valuation: $63.27
December 2009 Valuation: $66.87
March 2010 Valuation: $77.95
November 2010 Valuation: $77.55
March 2011 Valuation: $73.83
October 2011 Valuation: $93.05
October 2012 Valuation: $95.81
Recommendation: SELL
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Sell 200 Shares at MKT Price
Stock maybe at peak price due to recent market
exuberance
McDonalds does not seem to fit with the general
portfolio goals of RCMP (its difficult to discover
value in a stock covered my many analysts)
There is no shame in leaving the poker table on top
 Our
Gain: $9,810 (Increase of 93.54%)
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