NYSE: MCD
MCDONALD'S CORP
Report created Feb 4, 2014 Page 1 OF 4
McDonald's is the world's largest restaurant chain, with more than 35,000 fast-food restaurants in 119
countries. The company is a member of the Dow Jones Industrial Average and the S&P 500. With a market
capitalization of nearly $93 billion, MCD is generally considered a large-cap growth stock.
Argus Recommendations
Twelve Month Rating SELL HOLD BUY
Analyst's Notes
Five Year Rating SELL HOLD BUY
Analysis by John Staszak, CFA, February 4, 2014
ARGUS RATING: HOLD
Sector Rating
• Margin pressure in 2014; trimming full-year estimate
• On January 23, McDonald's reported 4Q13 operating earnings of $1.40 per share, up from $1.38 in
the same period last year and above the consensus estimate of $1.39.
• In 2014, we expect full-year revenue to increase from $28.1 billion to $29.6 billion, with comp growth
of just 0.9%. We also expect operating margins to decrease slightly this year due to rising labor and
SG&A costs.
• We are lowering our 2014 EPS estimate from $6.12 to $5.95 and establishing a 2015 estimate of
$6.40.
• In our view, the current MCD share price adequately reflects prospects for slower earnings growth in
2014. MCD shares are trading at 15.6-times our revised 2014 EPS estimate, compared to a historical
range of 8-21.
INVESTMENT THESIS
In the near term, we continue to expect soft same-store sales at HOLD-rated
McDonald's Corp. (NYSE: MCD). Operating income increased slightly year-over-year in
4Q13, but same-store sales were down 0.1%.
MCD has surpassed its annual operating income growth target of 6%-7% over the past
several years. However, we think that negative currency effects and high commodity prices
will lead to slower earnings growth over the next two years. Higher G&A expense and
lower margins in Europe are also likely to pressure earnings. If same-store sales leverage
outweighs the impact of higher commodity costs, or foreign exchange is more favorable
than we expect, we would consider placing the stock back on our BUY list.
Based on the company's ability to gain market share and carefully manage operating
expenses, our long-term rating remains BUY.
RECENT DEVELOPMENTS
On January 23, McDonald's reported 4Q13 operating earnings of $1.40 per share, up
from $1.38 in the same period last year and slightly above the consensus estimate of $1.39.
Higher revenue, offset in part by increased expenses and a 0.1% decline in same-store
Market Data
Pricing reflects previous trading week's closing price.
200-Day Moving Average
52 Week High: $103.70
52 Week Low: $92.22
Closed at $95.15 on 2/28
Price
($)
80
70
Rating
BUY
HOLD
SELL
Key Statistics pricing data reflects previous trading day's closing
price. Other applicable data are trailing 12-months unless
otherwise specified
Market Overview
Price
Target Price
52 Week Price Range
Shares Outstanding
Dividend
$93.02
-$92.22 to $103.70
995.03 Million
$3.24
Sector Overview
Consumer Discretionary
Sector
OVER WEIGHT
Sector Rating
12.00%
Total % of S&P 500 Market Cap.
Financial Strength
Financial Strength Rating
Debt/Capital Ratio
Return on Equity
Net Margin
Payout Ratio
Current Ratio
Revenue
After-Tax Income
MEDIUM-HIGH
47.1%
36.8%
19.9%
0.55
1.45
$28.11 Billion
$5.59 Billion
($)
1.23
1.32
1.43
1.38
1.26
1.38
5.36
Annual
1.52
1.40
1.37
5.55
14.53
15.63
3.29
6.10
$15.24
$92.56 Billion
Forecasted Growth
EPS
1.44
1.60
1.54
5.95 ( Estimate)
1.46
1.51
1.70
1.73
6.40 ( Estimate)
Revenue
1 Year EPS Growth Forecast
7.21%
5 Year EPS Growth Forecast
10.00%
1 Year Dividend Growth Forecast
5.77%
Risk
($ in Bil.)
6.5
7.2
7.2
7.0
6.6
7.1
7.3
7.4
7.0
Q1
Q2
Q3
2012
Q4
Q1
Q2
Q3
2013
Q4
Q1
27.9
Annual
FY ends
Dec 31
Key Statistics
Current FY P/E
Prior FY P/E
Price/Sales
Price/Book
Book Value/Share
Market Capitalization
90
Quarterly
Argus assigns a 12-month BUY, HOLD, or SELL rating to each
stock under coverage.
• BUY-rated stocks are expected to outperform the market (the
benchmark S&P 500 Index) on a risk-adjusted basis over the
next year.
• HOLD-rated stocks are expected to perform in line with the
market.
• SELL-rated stocks are expected to underperform the market
on a risk-adjusted basis.
The distribution of ratings across Argus' entire company
universe is: 44% Buy, 50% Hold, 6% Sell.
Valuation
100
Quarterly
Under Market Over
Weight Weight Weight
28.4
7.5
7.6
7.5
29.6 ( Estimate)
Q2
Q3
2014
Q4
7.0
Q1
7.6
7.7
7.6
29.9 ( Estimate)
Q2
Q3
2015
Beta
Institutional Ownership
0.79
64.70%
Q4
Please see important information about this report on page 4
©2014 Argus Research Company
Argus Analyst Report
NYSE: MCD
MCDONALD'S CORP
Report created Feb 4, 2014 Page 2 OF 4
Analyst's Notes...Continued
sales, led to the slightly better-than-expected earnings.
Fourth-quarter revenue of $7.1 billion was up 2% from the prior
year, matching the consensus estimate. Same-store sales were up
1.0% in Europe, but declined 1.4% in the U.S. and 2.4% in the
APMEA region. In the U.S, aggressive competition, flat customer
traffic and extreme weather in December hurt same-store sales. In
Europe, the higher comps reflected continued strength in Russia,
the United Kingdom and France, offset in part by weakness in
Germany. In the APMEA region, weakness in Japan and flat comps
in China and Australia hurt same-store sales. The operating margin
fell to 31.0% in 4Q13 from 31.6% in 4Q12. The margin
deterioration primarily reflected higher company-operated
restaurant expense and increased occupancy expense at franchised
locations. Interest expense rose moderately to $133.5 million.
Reflecting share repurchases during the quarter, the share count
decreased from 1.01 billion to just over 999 million.
In 2013, McDonald's earned $5.55 per share, up from $5.36 in
the prior-year period. Full-year revenue grew 2% to $28.1 billion
on 0.2% higher same-store sales.
During the 4Q conference call, management said that January
comps were likely to come in 'relatively flat.' This comment is
especially disappointing in that January 2014 follows weak results
in the prior-year period, when comps fell 1.9%. January 2014 also
includes an additional weekend day, which is expected to benefit
comps by 100 basis points. Management's January comp forecast
was well below the 2.4% consensus estimate.
EARNINGS & GROWTH ANALYSIS
In 2014, we expect revenue to increase from $28.1 billion to
$28.8 billion, in line with consensus. We now project 0.8% higher
same-store sales and 36,300 stores in 2014 (versus 1.0% higher
comps and 36,700 stores previously). In the U.S., we expect slightly
higher same-store sales. In Europe, driven by the implementation of
value menus and seasonal food events, we also project modestly
higher comps.
We look for a slightly lower operating margin in 2014 as labor
costs rise and SG&A increases. We think that food costs will rise as
fast as the company is able to raise menu prices. Primarily
reflecting continued modest same-store sales and reduced unit
growth, we are lowering our 2014 EPS estimate from $6.12 to
$5.95. For 2015, we are establishing an estimate of $6.40.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating for McDonald's remains
Medium-High, the second-highest rank on our five-point scale. We
are encouraged by the company's plans to refranchise stores, as
these locations require no capital expenditures and improve free
cash flow. The company did not include a balance sheet with its
fourth-quarter earnings announcement. The debt/capitalization
ratio was 47.1% at the end of 3Q13, unchanged from the end of
4Q12. Operating income covered interest expense by a factor of
16.4 in 4Q13.
In November 2013, the company raised its quarterly dividend
Growth & Valuation Analysis
GROWTH ANALYSIS
($ in Millions, except per share data)
Revenue
COGS
Gross Profit
SG&A
R&D
Operating Income
Interest Expense
Pretax Income
Income Taxes
Tax Rate (%)
Net Income
Diluted Shares Outstanding
EPS
Dividend
GROWTH RATES (%)
Revenue
Operating Income
Net Income
EPS
Dividend
Sustainable Growth Rate
VALUATION ANALYSIS
Price: High
Price: Low
Price/Sales: High-Low
P/E: High-Low
Price/Cash Flow: High-Low
Financial & Risk Analysis
2009
22,745
13,953
8,792
2,234
—
6,841
454
6,487
1,936
30
4,551
1,107
4.11
2.05
2010
24,075
14,437
9,637
2,333
—
7,473
431
7,000
2,054
29
4,946
1,080
4.58
2.26
2011
27,006
16,319
10,687
2,394
—
8,530
454
8,012
2,509
31
5,503
1,045
5.27
2.53
2012
27,567
16,751
10,816
2,455
—
8,605
489
8,079
2,614
32
5,465
1,020
5.36
2.87
2013
28,106
17,203
10,903
2,386
—
8,764
522
8,205
2,619
32
5,586
1,006
5.55
3.12
-3.3
6.2
5.5
9.3
26.2
16.6
5.8
9.2
8.7
11.4
10.2
17.5
12.2
14.1
11.3
15.0
11.9
19.7
2.1
0.9
-0.7
1.7
13.4
17.1
2.0
1.9
2.2
3.7
8.7
17.1
$64.75
$50.44
3.2 - 2.5
15.8 - 12.3
12.5 - 9.7
$80.94
$61.06
3.6 - 2.7
17.7 - 13.3
13.8 - 10.4
$101.00
$72.14
3.9 - 2.8
19.2 - 13.7
14.8 - 10.5
$102.22
$83.31
3.8 - 3.1
19.1 - 15.5
15.0 - 12.2
$103.70
$89.25
3.7 - 3.2
18.7 - 16.1
14.7 - 12.7
FINANCIAL STRENGTH
Cash ($ in Millions)
Working Capital ($ in Millions)
Current Ratio
LT Debt/Equity Ratio (%)
Total Debt/Equity Ratio (%)
2011
2,336
894
1.25
84.3
86.9
2012
2,336
1,519
1.45
89.1
89.1
2013
2,799
1,880
1.59
88.3
88.3
RATIOS (%)
Gross Profit Margin
Operating Margin
Net Margin
Return On Assets
Return On Equity
39.6
31.6
20.4
16.9
37.9
39.2
31.2
19.8
16.0
36.8
38.8
31.2
19.9
15.5
35.7
RISK ANALYSIS
Cash Cycle (days)
Cash Flow/Cap Ex
Oper. Income/Int. Exp. (ratio)
Payout Ratio
-1.8
—
17.3
40.6
-2.4
—
16.6
48.0
-3.5
—
16.7
53.6
The data contained on this page of this report has been
provided by Morningstar, Inc. (© 2014 Morningstar, Inc.
All Rights Reserved). This data (1) is proprietary to
Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or
losses arising from any use of this information. Past
performance is no guarantee of future results. This data
is set forth herein for historical reference only and is not
necessarily used in Argus’ analysis of the stock set forth
on this page of this report or any other stock or other
security. All earnings figures are in GAAP.
Please see important information about this report on page 4
©2014 Argus Research Company
Argus Analyst Report
NYSE: MCD
MCDONALD'S CORP
Report created Feb 4, 2014 Page 3 OF 4
Analyst's Notes...Continued
popular with diners. This segment combines the quality of
restaurants that offer table service with the rapid service of fast
food, and has grown rapidly over the past several years.
from $0.77 per share to $0.81, or $3.24 annually, for a yield of
about 3.4%. By comparison, YUM! Brands and Wendy's both
yield about 2.2%. Our dividend estimates are $3.30 for 2014 and
$3.60 for 2015.
VALUATION
In our view, the current MCD share price adequately reflects
prospects for decelerating same-store sales in 2014. MCD shares
are trading at 15.6-times our revised 2014 EPS estimate and at
14.4-times our 2015 estimate, compared to a historical range of
8-21. They are also trading at a 2014 EV/EBITDA multiple of 9.2,
in line with the peer average. Based on our expectations for higher
near-term commodity costs and below-peer-average earnings
growth, we expect limited share price gains in the coming quarters
and are reiterating our HOLD rating. If same-store sales leverage
outweighs the impact of higher commodity costs or foreign
exchange is more favorable than we expect, we would consider
placing the stock back on our BUY list.
On February 4 at midday, HOLD-rated MCD traded at $93.17,
up $0.15.
RISKS
A key risk to our estimates and target price is the cost of beef.
We estimate that a 7%-9% increase in beef prices would reduce
annual EPS by a penny. Since 65% of the company's revenue is
generated outside the U.S., unfavorable foreign currency
movements also hurt earnings.
COMPANY DESCRIPTION
McDonald's is the world's largest restaurant chain, with more
than 35,000 fast-food restaurants in 119 countries. The company is
a member of the Dow Jones Industrial Average and the S&P 500.
With a market capitalization of nearly $93 billion, MCD is
generally considered a large-cap growth stock.
INDUSTRY
Restaurants face some tough headwinds. Domestically,
unemployment remains high, and the housing market is still
depressed, despite recent signs of improvement. Restaurant chains
with international operations could also be hurt by a recession in
Europe and slower growth in China.
We expect the 'fast casual' segment, exemplified by Chipotle
Mexican Grill and the Brinker International chains, to remain
Peer & Industry Analysis
Ticker Company
MCD McDonald's Corp
SBUX Starbucks Corp
YUM Yum Brands Inc
CMG Chipotle Mexican Grill Inc
DRI
Darden Restaurants Inc
DNKN Dunkin' Brands Group Inc
DPZ Domino's Pizza Inc
WEN Wendy's Co
EAT
Brinker International Inc
Peer Average
Growth
CMG
50
P/E
MCD vs.
Market
MCD vs.
Sector
More Value
More Growth
Price/Sales
40
MCD vs.
Market
MCD vs.
Sector
WEN
30
More Value
DNKN
DPZ
20
SBUX
MCD vs.
Market
MCD vs.
Sector
DRI
EAT
MCD
Value 10
15
20
Market Cap
($ in Millions)
92,558
52,134
29,463
16,809
6,211
4,912
3,765
3,422
3,143
23,602
Current
FY P/E
15.6
25.5
22.4
49.8
18.5
29.5
27.6
33.5
16.5
26.6
Net
Margin
(%)
19.9
11.9
8.3
10.2
4.1
20.1
7.7
1.4
5.8
9.9
1-yr EPS
Growth
(%)
7.6
18.5
20.0
21.1
9.4
20.5
13.1
19.2
9.2
15.4
More Value
More Growth
More Value
More Growth
PEG
25
5-yr Growth Rate(%)
5-yr
Growth
Rate (%)
10.0
20.0
12.0
23.0
11.0
16.0
10.0
11.0
11.0
13.8
More Growth
Price/Book
YUM
P/E
The graphics in this section are designed to
allow investors to compare MCD versus its
industry peers, the broader sector, and the
market as a whole, as defined by the Argus
Universe of Coverage.
• The scatterplot shows how MCD stacks
up versus its peers on two key
characteristics: long-term growth and
value. In general, companies in the lower
left-hand corner are more value-oriented,
while those in the upper right-hand corner
are more growth-oriented.
• The table builds on the scatterplot by
displaying more financial information.
• The bar charts on the right take the
analysis two steps further, by broadening
the comparison groups into the sector
level and the market as a whole. This tool
is designed to help investors understand
how MCD
might fit into or modify a
diversified portfolio.
Argus
Rating
HOLD
BUY
HOLD
BUY
HOLD
BUY
BUY
BUY
BUY
MCD vs.
Market
MCD vs.
Sector
5 Year Growth
MCD vs.
Market
MCD vs.
Sector
More Value
More Growth
Debt/Capital
MCD vs.
Market
MCD vs.
Sector
More Value
More Growth
Please see important information about this report on page 4
©2014 Argus Research Company
Argus Analyst Report
NYSE: MCD
METHODOLOGY & DISCLAIMERS
Report created Feb 4, 2014 Page 4 OF 4
About Argus
Argus Research, founded by Economist Harold Dorsey in 1934,
has built a top-down, fundamental system that is used by Argus
analysts. This six-point system includes Industry Analysis, Growth
Analysis, Financial Strength Analysis, Management Assessment,
Risk Analysis and Valuation Analysis.
Utilizing forecasts from Argus’ Economist, the Industry Analysis
identifies industries expected to perform well over the next
one-to-two years.
The Growth Analysis generates proprietary estimates for
companies under coverage.
In the Financial Strength Analysis, analysts study ratios to
understand profitability, liquidity and capital structure.
During the Management Assessment, analysts meet with and
familiarize themselves with the processes of corporate management
teams.
Quantitative trends and qualitative threats are assessed under
the Risk Analysis.
And finally, Argus’ Valuation Analysis model integrates a
historical ratio matrix, discounted cash flow modeling, and peer
comparison.
THE ARGUS RESEARCH RATING SYSTEM
Argus uses three ratings for stocks: BUY, HOLD, and SELL.
Stocks are rated relative to a benchmark, the S&P 500.
• A BUY-rated stock is expected to outperform the S&P 500 on
a risk-adjusted basis over a 12-month period. To make this
determination, Argus Analysts set target prices, use beta as the
measure of risk, and compare expected risk-adjusted stock
returns to the S&P 500 forecasts set by the Argus Market
Strategist.
• A HOLD-rated stock is expected to perform in line with the
S&P 500.
• A SELL-rated stock is expected to underperform the S&P 500.
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from any use of this information. Past performance is no guarantee of future results.
©2014 Argus Research Company
Argus Analyst Report