McDonald’s
Shivam Khanna
Brandon McArthur
March 3, 2009
Agenda
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Macroeconomic Review
Industry Overview
McDonalds Overview
Historical Performance
Recent Events/Performance
Financial Projections
Macroeconomic Overview
• U.S GDP 4th Quarter 2008 Down 6.2%
• Worst Economic Crisis since Great
Depression
• Dow Jones Down about 50% from a year
ago currently near 6,750
• The Dow fell almost 12% in February
• S&P 500 fell 11%, its weakest February
since 1933; Consumer Confidence &
Unemployment at historic lows
Fast Food Industry
• Focus on Convenience
• Heavily Saturated Market with a few large
leaders
• Movement towards Franchising versus
Company Owned
• McDonalds viewed as Market Leader
(Market Cap: $58billion)
McDonald’s Overview
• Leading global foodservice retailer
• Serves 52mm people a day in 100
countries
• Headquartered in Oakbrook, IL
• 31,967 restaurants in 118 countries,
– 18,402 operated by franchisees;
– 4,137 operated by affiliates;
– 6,502 were operated by the company.
Strategy
• U.S Store Growth
“Being Better Not Just Bigger”
• Expanding product offerings
– Healthier menu transition
– McCafe Specialty Drinks
• Increased franchising
– Many company operated store are being
franchised, especially in Europe
– Decreases top line, increases margins
Measuring Growth
Systemwide Sales: sales at all restaurants, whether
operated by the Company, by franchisees or by affiliates (6.9%)
Comparable Sales: percent change in constant currency
sales from the same period in the prior year for all restaurants
in operation at least thirteen months, including those temporarily
closed. Does not include Sales by franchisees and affiliates are
not recorded as revenues by the Company (11%)
Return on Incremented Invested Capital:
evaluates the overall profitability of the business units,
the effectiveness of capital deployed and the future allocation
of capital
Shareholder structure
% Held by
Insiders:
% Held by
Institutions:
% Heldy by
Individuals
5 Year Historical Performance
Geographic Exposure
McDonald's International
Revenues
Geographic Region
Percent of Total Revenues
US
35%
France, Germany, UK
21%
Rest of Europe
14%
Australia, China, Japan
8%
Rest of Asia, the Middle
East, Africa
8%
Strengths
•Uniform menu offerings can be mass
produced, lowering production costs.
•Bargaining power with suppliers lowers
input costs and boosts margins.
•Large advertising budget means lots of
domestic and international exposure.
•Viewed as Market Leader
Opportunities
•Expansion of McCafe’s Specialty
Drink Business
•Store Growth Internationally
(specifically china)
Weaknesses
•Heavy Dependence on
Commodity Cost (Beef,
Chicken)
•U.S Saturated Market
Threats
•Currency Risks
•Inability to create new
products
•Shift of consumer demand
(health conscious)
Debt Financing
• Unused 1.3B line of credit expiring in 2012
• No plan to pay back debt before maturity
• Most of the Debt of is long term
Risk Management
• Hedge Interest Rate Risks through Swaps
• Forward Foreign Exchange contracts mitigate
Currency Risk
Computing Wacc
• Cost of Equity
- Beta: 0.9
- Rf: 4%
- (Rm – Rf): 6%
- Ke: 9.4%
• Cost of Debt
- Kd: 4.7% (Weighted average of all debt of company)
• Wd: 14.2%
We: 85.8% Tax Rate: 35%
• WACC: 8.5%
Computing WACC
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Return on Equity (experienced 2002-2007): 14.85%
ke (from CAPM): 9.4%
Average: 12.13%
Spread: 2.72%
New ke: 10.72%
New WACC: 9.62%
9.4%
14.85%
12.13%
10.72%
DCF Analysis
DCF Valuation ($MM)
Sum of P.V. of FCF
Minus Outstanding Debt
Equity Value
Divided by shares outstanding
Equals Value +/- 10%
$86,928
-$10,262
$76,666
$63.27
69.59 / 56.94
Operating leases
• Company owns 45% of land and about 70% of
buildings
• As of 31st December 2007, the company was
the lessee at 13,322 restaurant locations
Future Minimum Payments under operating leases ($mm)
Restaurant Other
Total
2008
989.7
64.1
1053.8
2009
918.2
55.4
973.6
2010
853.9
44.6
898.5
2011
786.8
35.2
822
2012
729.6
27.7
757.3
Thereafter
5869.5
139.1
6008.6
Total Minimum Payments
10147.7
366.1
10513.8
Operating leases
Present Value of Operating Leases
Present Value
Sum PV
1
2008
1053.8
2
2009
973.6
3
2010
898.5
4
2011
822
951.79
794.23
662.01
547.02
5
5
2012 Thereafter
757.3
6008.6
455.18
7021.71
DCF Valuation ($MM)
Sum of P.V. of FCF
$86,927.90
Minus Outstanding Debt
-$10,262.00
Minus Contractual obligations(PV) -$7,021.71
Equity Value
$69,644.19
Divided by shares outstanding
$57.47
Equals Value +/- 10%
63.22 / 51.72
3611.49
Operating leases
• Franchise agreements also include a minimum
rent payment that parallel the underlying leases
and escalations
Future Minimum rent payments due to the company ($mm)
Owned Sites Leased Sites Total
2008
1120.1
933.4
2053.5
2009
1084.3
905.8
1990.1
2010
1045.2
874.5
1919.7
2011
995.6
838.2
1833.8
2012
959.3
809
1768.3
Thereafter
7117.7
5414.8
12532.5
Total Minimum Payments
12322.2
9775.7
22097.9
Comparables
• McDonald’s
• Yum Brands
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Return on Equity: 30.10%
Return on Assets: 13.58%
P/E Ratio: 12.35
Payout Ratio: 42%
Operating Margins: 26.71%
Leverage Ratio: 15%
• Burger King
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Return on Equity: 22.18%
Return on Assets: 8.38%
P/E Ratio: 12.98
Payout Ratio: 18%
Operating Margins: 13.70%
Leverage Ratio: 26%
Return on Equity: 187%
Return on Assets: 13.09%
P/E Ratio: 10.76
Payout Ratio: 35%
Operating Margins: 12.7%
Leverage Ratio: 23.2%
• Industry
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P/E Ratio: 10.46
Operating Margins:4.84%
Company Margins
• EBIT margins
- Company has witnessed a growth in margins from 13% in 2003 to
33% in 2008
• Net Profit Margins
- Company has witnessed an increase in margins from about
8%(2002) to 18.35%(2008)
• Company has a dividend payout
ratio of approximately 42%
Dividend Payout Ratio
• Is it sustainable?
- Is it possible for the company to maintain this payout ratio
assuming situation deteriorates?
Yes
- Out of the $5.8 billion paid out in 2008, $1.8billion was in the form
of dividends
- Company has raised dividend for 32 consecutive years
- Company is evolving into a less capital intensive business
- 2007 ending cash balance was $5billion. Steady cash flows will
from franchisees
- 2008 was a very tough year for markets and McDonald’s raised
dividend in 4th quarter
Outlook for McDonald's
• Company plans to evolve to a less capital
intensive business with more stable cash
flows
- Company plans to re-franchise approximately 1000 stores by 2010 of which 675
were re-franchised in 2008. Results in a higher margin as a % of revenues
• Company plans capital outlay of
approximately $2-$2.5 annually
- $1billion o revamp existing stores and remaining for new stores
Store growth
Restaurants at December 31,
Operated by franchisees(1)
Operated by the Company
New stores
Operated by affiliates
Systemwide restaurants
% growth
Revenue per store ($mm)
Company owned
% growth
Franchisees and affiliates
% growth
2005
18,324
8,173
4,269
30,766
2006
18,685
8,166
-7
4,195
31,046
0.91%
2007
20,505
6,906
-1,260
3,966
31,377
1.07%
2008E
2009E
2010E
2011E
2012E
2013E
2014E
2015E
2016E
25,367
6,606
-300
26,307
6,306
-300
27,159
6,106
-200
27,824
6,106
0
28,503
6,106
0
29,195
6,106
0
29,901
6,106
0
30,621
6,106
0
31,356
6,106
0
31,973
1.9%
32,613
2.0%
33,265
2.0%
33,930
2.0%
34,609
2.0%
35,301
2.0%
36,007
2.0%
36,727
2.0%
37,462
2.0%
2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
1.715 1.886 2.405 2.646 2.857 3.029 3.180 3.339 3.506 3.682 3.866 4.059
10.0% 27.5% 10.0% 8.0% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
0.226 0.240 0.252 0.265 0.278 0.292 0.307 0.322 0.338 0.355 0.373 0.391
6.4% 5.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Outlook for McDonald's
• Company planned to return $15-$17 billion
worth of cash to shareholder’s between
2007-2009
- Till date company has returned approximately $11.5 billion
- Company plans to purchase shares upto $10billion from public
without a specific timeline. Purchased $4billion worth of stock in
2008 and $3.9billion worth of stock in 2007
• Company increased dividend rate in 4th
quarter of 2008 by 33% taking its annual
dividend amount to $2
Outlook for McDonald’s
• Company has seen increased margins from
Franchisees
- Up from 73% in 2003 to 82% in 2008
• Company has witnessed strong double digit
growth in China and India and views these
markets as potential growth
• Has introduced a range of new
breakfast/nutritious products that have achieved
success and appealed to a new set of customers
Outlook for McDonald's
• Company has seen strong growth in
Europe especially at McCafe’s
- Plans to add 200 McCafe’s in 2009
- Plans on doubling the number of 24hr open restaurants
• No immediate reason to raise debt
- Has strong credit ratings
- Most of debt is long term
- Average borrowing cost of 4.7%
• Cheap prices help it benefit during a
recession
Risks
• Foreign Currency continues to be biggest risk for
company
- Approximately 65% of debt is in foreign denominated currency
- Company has greatest exposure to Euro, GDP, Canadian Dollar, Australian dollar (approx 70%
of all revenues)
- If all the currencies changed by 10% in the same direction company’s annual net income would
change by about 12-15 cents. Weak dollar in 2009 could negatively affect earnings
• Lawsuits
• Decline in demand; Failure to launch new
products
• Rise in price of inputs
Conclusion
• We recommend purchase of 200 Shares
McDonald's at the current market price
– Stock Market has declined over 50% in 1 year and Mcd’s has fallen about 30%