McDonald’s Corporation
Financial Analysis
By Brenda Hudson, John Doe
and Mary Smith
BUS307 Research Project
McDonald’s Business
Overview
• Largest fast food restaurant operator
• Serves 47 + million people daily
• 31,xxx restaurants in 121 countries
– 23,xxx are company-owned
– 7,8xx are franchised or affiliated
• System-wide sales of $33 + billion
McDonald’s Income
Statement
• 2003 Revenues of $17.14 billion
– 11.3% increase of which 5% was true
revenue growth
– Company-owned store revenue
• $12,795.4 million
• 74.7% of total
– Franchises/affiliates revenue
• $4,345.1 million
• 25.3% of total
McDonald’s Income
Statement
• Net Income went up 65.7%
– Revenues up by 11.3%
– Operating Costs and Expenses up by only 7.6%
• Total Op. Costs and Exp. – 83.5% of Revenue
• Most expenses increased by 10-12.7%
• SG&A increased by only 7%
• Net Income beats industry
– McDonalds Profit Margin = 8.6%
– Industry Profit Margin = 7.24%
– Wendy’s Profit Margin = 7.5%
McDonald’s Balance Sheet
• 2003 Total Assets of $25.525 billion
up by 6.5%
– Current Assets up 9.9% led by:
• Cash up 49.2%
• Prepaid Expenses & Other Current Assets up
by 26.5%
• Accounts & Notes Receivable down by 14.1%
– Largest Current Asset
– McDonald’s Current Assets are 7.4% of
Total Assets vs. Wendy’s (14.6%)
McDonald’s Balance Sheet
• 2003 Total Assets of $25.525 billion
up by 6.5%
– Net Property and Equipment
• Largest Asset, Fixed Asset
• 78.1% of assets (compare to Wendy’s (68.1%))
• Increased 7.2%
– Long-term Debt
• Largest Liability
• 36.6% of assets (compare to Wendy’s (21.9%))
• Decreased by 3.7%
McDonald’s Ratio Analysis
Current Ratio
– McDonald’s: 0.76 vs. Industry: 0.945 vs.
Wendy’s 0.87
Quick Ratio
– McDonald’s: 0.71 vs. Industry: 0.572 vs.
Wendy’s 0.56
High Inventory Turns – Better than comparables
– McDonald’s: 132.5x vs. Industry: 41.0x vs.
Wendy’s 39.05x
Days Sales Outstanding:
– 15.4 days down 4.6 days from 2002
– Receivables Turns – Lower than comparables
• McDonald’s 23.3 x/yr Vs. Industry: 36.8x/yr vs.
Wendy’s 29.83x/yr
McDonald’s Ratio Analysis
Lower Total Asset Turns:
– McDonald’s: 0.67 vs. Industry: 1.25 vs.
Wendy’s 1.11
Higher Debt Ratio:
– McDonald’s: 53.1% vs. Industry: 38.35% vs.
Wendy’s 29.58%
Higher Profit Margin:
– McDonald’s: 8.6% vs. Industry: 7.24% vs.
Wendy’s 7.5%
BEP, ROA, ROE trending up, but well below
industry and competition
Price/Earnings is lower than industry, higher
than Wendy’s
– McDonald’s: 21.59 vs. Industry: 27.73 vs.
Wendy’s: 20.65
McDonald’s Beta, Required Return
& Stock Price
• McDonald’s beta = 0.73
– Wendy’s beta = 0.363, Yum! Brands =
0.426, Restaurant Industry Beta = 0.57
– Cross-Industry Market Norm = 1
– McDonald’s σ of 10 years past returns =
40.1%
McDonald’s Beta, Required Return
& Stock Price
• McDonald’s Required Rate of Return
– Security Market Line (SML) – 11.2%
– Capital Market Line (CML) – 18.9%
– Average Required Return= 15.05%
• Sources:
– KRf = 5.7% (long-term government bond yield)
– KM = 12.7% (Long term yield on Large Stocks (19262001))
– Market σ of 10 years past returns = 21.05%
– McDonald’s σ of 10 years past returns = 40.1%
McDonald’s Beta, Required Return
& Stock Price
• McDonald’s Target Stock Price
– Four Methods:
•
•
•
•
Price Earnings – Average = $44.37
Market Book – Average = $32.9
Gordon Dividend Growth Model = $7.46
Ben Graham Model – $24.24
– Average Target Price is $32.20.
– Excluded Gordon Dividend Cost
McDonald’s Debt
• Current Liabilities up by 2.6%
• $9.7 billion in Long-term debt
(including current maturities)
– 3% decrease from 2002
– 16 bonds maturing from 2004 to 2033 at
coupon rates of 4.15% to 8.875%
– Weighted Average Interest Rate on total
debt = 4.1%
– Long Term Debt Ratings:
• Moody’s: A2, S&P: A, Fitch A
– Interest Expense up by 3.7% to 388 million
McDonald’s Stock &
Dividend History
• Public since 1966
• Market Cap = $36.6 billion
• Modest dividend strategy
– Current dividend is 40¢ / year
– Dividend increased 70% in 2003
– Increased 29 times since 1976
• Twelve Stock Splits
• Average annual stock appreciation of 20.8%
• Stock Repurchase of $439 million in 2003
(18.9 million shares)
McDonald’s Improvement Strategies
Undertaking “Revitalization” Strategy
• Reduce Operational Expenses
– Reduce SG&A – dollars toward systems, menu expansion,
training
• Asset Management and Utilization
• Reduce net capital spending
– Close underperforming restaurants
– Cautious expansion
• Increase same-restaurant sales
• Hedges are planned to combat weak foreign currencies
• Strategies for PR and food safety in light of mad cow
disease in some areas
• Tighten Quality Control within franchises
• Expand Partner Brands – be own competitor
• Cross-sell other products in restaurants
McDonald’s Summary &
Our Recommendations
• McDonald’s is restaurant segment leader – 40%
domestic quick-service restaurant market share
• Generates tremendous cash flow
– (Over $2 billion in 2003)
• Growth possibilities
– They are beyond high growth phase in US, but still
room for same-restaurant improvement and new
restaurants in some US markets
– Continue to replicate US success internationally
• Fast food restaurant market segment in trouble,
but McDonald’s is the leader in this segment.