Ticker: MCD
Sector: Consumer Services
Industry: Restaurant and
Bars
Recommendation: HOLD
Pricing
Closing Price $63.59
(2/12/20)
52-wk High $65.75 (2/3/10)
52-wk Low $50.44 (3/5/09)
Market Data
Market Cap $68.86 B
Shares Outstanding 1.08B
Trading Volume 7.87M (3
mo)
Valuation
EPS $4.12
P/E 15.50
Profitability and
Effectiveness (ttm)
ROA 15.15%
ROE 34.25%
Net Profit Margin 20.01%
Oper Margin 28.83%
McDonald’s Corporation
Company Overview
McDonald’s Corporation is one of the largest and most
recognizable brands in the food service industry. The company
franchises and operates McDonald’s restaurants worldwide.
They currently employ over 400,000 people and serve over 47
million customers daily. At the end of 2008, they operated
31,967 restaurants in 118 countries. Revenue comes from rent,
royalties, and fees paid by McDonald’s franchisees as well as
sales from company operated restaurants. We currently own 500
shares of McDonald’s Corporation. This is about 2.99% of the
Investment Fund Management’s portfolio.
McDonald’s offers a variety of food items and soft drinks.
Currently, they are promoting their new premium coffees, trying
to win customers over from national coffee chains. They are
also offering new healthier options, to aid the growing demand
for healthy choices.
Analyst Name:
Ashley Taube
AMT2M9@mail.missouri.edu
Today, McDonald’s is focused on quality, service, cleanliness,
and value. From 2003 to 2008, the company experienced a 25%
increase in the number of customers a day. To assist in today’s
busy lifestyles, they are implementing more convenience
initiatives to the stores including drive-thrus, cashless payments,
and extended 24-hour service.
1
Products
McDonald’s offers a variety of food products, from hamburgers and fries to ice cream and
parfaits. The company does their best to incorporate local cuisine into each country’s menu. For
example, in Japan a customer can get seaweed fries and in Hong Kong a curry potato pie.
A fairly new addition to the McDonald’s menu is their new premium coffee. The coffee
promotes its value and taste. From July 2007 to July 2009, coffee has grown from 2 percent of
sales to 5 percent of sales.
McDonald’s is taking the initiative to add health conscious items to their menu. They have
added the mid-day snack wrap along with improved salads. The company has even added
healthier items for childrens Happy Meals such as milk and apple dippers.
McDonald’s also offers a diverse breakfast menu.
Image
McDonald’s is emphasizing service enhancements. They are leveraging technology to make it
easier for managers and crew to serve customers. They are also reimaging their restaurants.
They are adding community tables, internet, and WiFi to make the restaurant more modern and
convenient. They are also making changes to their menu to sustain momentum and make things
exciting for customers.
Franchisees
The first McDonald’s franchisee was purchased in 1955 by Ray Kroc who later purchased the
McDonald brothers equity in the company and led to company’s worldwide expansion. Of the
31,000 restaurants worldwide, 25,465 were operated by franchisees. The rest are operated by the
company. McDonald’s has two types of franchisee arrangements. In the conventional
franchisee arrangement, franchisees provide a portion of the required capital and McDonald’s
owns the land and building or secures long term leases of sites. Under the developmental license
arrangement, licensees provide capital for the entire business, including the real estate, while
McDonald’s has no capital invested.
2
Growth
McDonalds is expected to remain flat in the United States and Europe in the upcoming years, but
will continue to grow in Asia. McDonald’s recently announced a global comparable growth in
sales for January 2010. Although sales decreased in the United States, they increased in Europe
and Asia/Pacific, Middle East, and Africa (APMEA).
Percent Increase/(Decrease)
Comparable
Systemwide Sales
Sales
Month ended January 31,
2010
2009
As
Reported
Constant
Currency
-------------------------------------------------------------------McDonald's Corporation
2.6
7.1
9.1
4.3
(0.7)
5.4
(0.1)
(0.1)
Europe
4.3
7.1
15.5
6.7
APMEA*
4.3
10.2
15.2
7.2
Major Segments:
U.S.
-------------------------------------------------------------------* Asia/Pacific, Middle East and Africa
Recently, McDonald’s Japan (a 50% owned affiliate) announced plans to close 430 restaurants
over the next year and a half as a strategic view of the company’s real-estate portfolio. These
actions are intended to enhance customer experience, overall profitability, and returns of the
market. They expect to receive about $40 to $50 million in charges. In the meantime, they plan
on opening about 60 new restaurants in Japan.
McDonald’s is planning on adding 150 to 175 new stores in China this year alone, boosting its
capital investment in the country by 25%. In Russia, they are accelerating their current growth
by 20%, adding 40 to 45 new stores in 2010. 1000 new stores will be opened worldwide this
year.
Industry/Competitors
On average McDonald’s has annual sales growth of 3 to 5%, average annual operating income
growth of 6 to 7%, and return on incremental invested capital in the high teens. They continue to
3
outperform the teens, enabling further reinvestment in their business. Given their strong
competitive position, they are increasing capital expenditures in 2010 to $2.4 billion for strategic
brand differentiating investments such as reimaging. They feel this is realistic, and are focused
on making decisions for the long term.
The fast food industry has not been deeply affected by the recession. McDonald’s relies on their
value image during downward times. McDonald’s has been performing better than the S&P 500
and their biggest competitor Yum Brands the past three months. However, competitors Chipotle
Mexican Grill and Wendy’s have been outperforming McDonald’s.
Valuation
Dividend
Change
Chg %
Earnings
per share
P/E
ratio
Mkt Cap
Margins
Dividend
Net profit
margin
Operating
margin
Company name
Price
MCD
McDonald's Corporation
63.59
-0.20
-0.31%
4.12
15.45
68.63B
0.55
20.37
30.57
BKC
Burger King Holdings, ...
18.22
-0.05
-0.27%
1.48
12.29
2.46B
0.06
7.78
13.67
WEN
Wendy's Arby's Group Inc.
4.77
+0.02
0.42%
-0.81
2.21B
0.15
1.58
6.29
TAST
Carrols Restaurant Gro...
6.46
-0.07
-1.07%
1.02
139.50M
0.00
2.78
6.72
GTIM
Good Times Restaurants...
1.08
-0.05
-4.42%
-0.42
4.21M
0.00
-3.52
-2.16
YUM
Yum! Brands, Inc.
33.36
-0.03
-0.09%
2.22
15.05
15.65B
0.42
6.48
11.14
CKR
CKE Restaurants, Inc.
8.35
0.00
0.00%
0.64
12.96
460.81M
0.06
1.90
5.02
JACK
Jack in the Box Inc.
21.68
+0.18
0.84%
2.27
9.55
1.20B
0.00
7.52
12.34
MRFD
Morgan's Foods, Inc.
3.45
0.00
0.00%
0.10
33.08
10.13M
0.00
2.06
5.39
CMG
Chipotle Mexican Grill...
104.87
+3.75
3.71%
3.48
30.13
3.32B
0.00
8.89
14.14
PZZA
Papa John's Int'l, Inc.
21.92
-0.05
-0.23%
2.03
10.81
619.02M
0.00
4.79
7.45
6.36
4
The size of McDonald’s in relation to the industry allows it to remain stable and absorb market
fluctuations and changes much easier than its smaller competitors.
SWOT Analysis
Stengths
Increasing Brand Value - McDonald’s is a globally recognized name. In 2008, McDonald’s
ranked eighth out of the top 100 global brands in Business Week Magazine and Interbrand, a
branding consultancy. It valued McDonald’s brand at $31 billion at the end of 2008. To
increase further equity with their brand, McDonald’s makes investments in advertising and
promotions. This strong brand draws customers to the restaurants and allows for acceptability in
new markets.
Diversified Geographic Presence – McDonald’s restaurants are present throughout the world. In
2008, Europe accounted for 42.2% of total revenues. The United States accounted for 34.3%.
APMEA accounted for 18%. Canada and Latin America accounted for 5.5%. McDonald’s
global presence allows for reduced business risk and leads to stable revenue growth.
Economies of Scale – McDonald’s generates nearly ten times the amount of revenues as its
closest competitors. This allows the company to have a significant advantage entering new
markets and selecting restaurant locations. The restaurants can be found anywhere from
neighborhoods, malls, airports, colleges, and Wal-Marts. This also gives McDonald’s an
advantage when dealing with supplier negotiations and pricing.
Weaknesses
Legal proceedings – McDonald’s faces various litigations from across the world. Claims against
the company include violation of state consumer fraud acts, unfair competition or deceptive trade
practices, strict liability, failure to warn, negligence, breach of express and implied warranties,
fraud and fraudulent concealment, negligent misrepresentation and concealment, unjust
enrichment, and false advertising. McDonald’s can face unspecified costs to any of these claims.
Opportunities
Growth of franchisee operated restaurants – Adding more franchisee operated restaurants will
help McDonald’s growth globally. McDonald’s has seen increased income from franchises over
the past years and wants to continue that growth in the future. In 2007, McDonald’s completed
the transition of over 1500 franchises in Latin America to 20 year master franchisee agreements.
5
The continuing push to convert company operated restaurants to franchisees and developmental
licenses is likely to increase the overall profitability of the company.
New restaurant openings – McDonald’s is pursuing geographical expansion by spending more
than $2 billion in FY2009 to open new and remodel existing restaurants. They plan to open
about 30% in markets such as Japan and Latin America where the company does not fund any
capital expenditures. This will allow the company to strengthen its extensive geographic reach
as well as boost its top line.
Growing hot beverages market – By 2012, McDonald’s global hot drinks market is forecasted to
have a value of over $66 billion. This is an increase of 13.1% since 2007. Coffee accounts for
54.7% of the global hot drinks market’s value. To take advantage of the growing beverage
category, McDonald’s has begun making espresso-based hot and cold specialty coffees. The
expected growth will offer the company opportunities for expanding its revenue base.
Threats
Consumer spending adversely impacted by global economic downturn – The western world,
including the US, the UK, Germany, France, Italy, Spain, Japan, and Australia are currently in a
recession. The key emerging market economies are also experiencing downturns, including
China, the Middle East, and Brazil. This has led to a severe decline in consumer confidence.
Consumers have less money for discretionary purchases. This would result in decreases in
customer traffic and average value per transaction. McDonald’s is sensitive to changes in
customer traffic. The current economic downturn would put downward pressure on the
company’s margins.
Healthy Eating – With rising rates in obesity, eating right has become a concern for many
people. There has also been some talk of imposing a fast food tax. However, in the meantime,
McDonald’s is offering healthier options for more health-conscious people.
Dividends
McDonald’s will continue to grow free cash flow in the future. They intend to return all of that
cash to shareholders over the long term via dividends and share repurchases. The past quarter
saw an increase in dividends of $.05, from $.50 to $.55. They returned $2.05 in dividends over
the past year. They have had a stable increase in dividends over their lifetime and should only
continue that increase in the future.
6
Analyst Opinions
Recently Goldman Sachs has added McDonald’s to the buy list, raising its price target by $2 to
$75. Bank of America/Merrill Lynch also increased its price target by $1 to $71. Currently, no
one believes the stock will underperform.
Current Month
Last Month
Two Months Ago
Three Months Ago
Strong Buy
8
8
8
8
Buy
5
5
5
5
Hold
8
8
8
7
Underperform
0
0
0
0
Sell
0
0
0
0
Valuation
For the valuation, I used the Warren Buffett Owner Earnings Model. On the first attempt, I used
the financials from FY2008. Assuming a discount rate of 10%, a first stage growth rate of 7%,
and a second stage growth rate of 3%, the intrinsic value only came out to $54.67. While these
rates might be conservative, I did not want to overvalue the stock. This was much lower than
what McDonald’s stock is currently trading for. However, FY2008 records seemed outdated, so
I compiled the last four quarters using the same discount and growth rates, and ended coming up
with an intrinsic value of $59.48. This was number was much closer to what the stock is
currently trading for.
4%
5%
First Stage Growth
Rate
6%
7%
8%
9%
10%
11%
12%
Terminal Growth Rate
2%
3%
4%
$44.56
$47.79
$52.10
$47.84
$51.40
$56.14
$51.38
$55.19
$59.29
$63.70
$68.45
$73.56
$79.06
$55.29
$59.48
$64.00
$68.87
$74.11
$79.76
$85.84
$60.50
$65.21
$70.28
$75.76
$81.66
$88.02
$94.88
5%
$58.13
$62.78
$67.80
$73.22
$79.08
$85.40
$92.23
$99.59
$107.53
The Warren Buffett Owner Earnings Model shows that the stock is valued somewhat fairly. I
would recommend to hold the stock at the current time until FY2009 financial statements are
7
released. At the current time, McDonald’s should continue to have a stable performance and
remain the market leader in this uncertain economy. It’s brand name, value, and dividends
should allow for stable growth in the future.
8
Income Statement (quarterly)
PERIOD ENDING
30-Sep-09
30-Jun-09
31-Mar-09
31-Dec-08
Total Revenue
6,046,700
5,647,200
5,077,400
5,565,000
Cost of Revenue
3,638,400
3,477,300
3,217,200
3,489,200
Gross Profit
2,408,300
2,169,900
1,860,200
2,075,800
-
-
-
-
394,000
570,200
458,600
622,300
1,200
1,200
62,000
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
(1,500)
Others
-
-
-
-
Total Operating Expenses
-
-
-
-
2,015,800
1,598,500
1,400,400
1,391,500
49,500
92,900
11,100
1,939,400
1,711,300
1,493,300
1,513,300
117,800
119,300
120,900
116,200
1,821,600
1,592,000
1,372,400
1,397,100
560,600
498,300
392,900
411,800
-
-
-
-
1,261,000
1,093,700
979,500
985,300
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
(13,100)
Non-recurring Events
9
Discontinued Operations
-
-
-
-
Extraordinary Items
-
-
-
-
Effect Of Accounting Changes
-
-
-
-
Other Items
-
-
-
-
1,261,000
1,093,700
979,500
985,300
-
-
-
-
$1,261,000
$1,093,700
$979,500
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
$985,300
Balance Sheet (quarterly)
PERIOD ENDING
30-Sep-09
30-Jun-09
31-Mar-09
31-Dec-08
Assets
Current Assets
Cash And Cash Equivalents
2,201,000
2,160,600
1,978,700
2,063,400
-
-
73,800
-
Net Receivables
879,400
930,500
903,400
931,200
Inventory
106,800
102,600
99,200
111,500
Other Current Assets
415,600
403,300
395,300
411,500
Total Current Assets
3,602,800
3,597,000
3,450,400
3,517,600
Long Term Investments
1,228,700
1,129,200
1,101,700
1,222,300
Property Plant and Equipment
21,350,300
20,754,100
19,754,200
20,254,500
Goodwill
2,408,200
2,339,400
2,198,000
2,237,400
Short Term Investments
10
Intangible Assets
-
-
-
-
Accumulated Amortization
-
-
-
-
1,482,400
1,387,400
1,306,300
1,229,700
-
-
-
-
30,072,400
29,207,100
27,810,600
28,461,500
3,116,100
2,385,900
2,154,900
2,506,100
424,300
457,600
58,000
31,800
-
-
-
-
Total Current Liabilities
3,540,400
2,843,500
2,212,900
2,537,900
Long Term Debt
10,657,900
10,492,900
10,422,600
10,186,000
Other Liabilities
1,548,500
1,539,900
1,479,500
1,410,100
Deferred Long Term Liability Charges
1,136,000
1,086,200
1,012,500
944,900
Minority Interest
-
-
-
-
Negative Goodwill
-
-
-
-
16,882,800
15,962,500
15,127,500
15,078,900
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
-
Redeemable Preferred Stock
-
-
-
-
Preferred Stock
-
-
-
-
11
Common Stock
16,600
16,600
16,600
16,600
Retained Earnings
30,056,000
29,927,300
29,380,700
28,953,900
Treasury Stock
(22,519,400)
(21,792,400)
(21,046,300)
(20,289,400)
Capital Surplus
4,744,300
4,697,900
4,635,700
4,600,200
892,100
395,200
Total Stockholder Equity
13,189,600
13,244,600
12,683,100
13,382,600
Net Tangible Assets
$10,781,400
$10,905,200
$10,485,100
$11,145,200
Other Stockholder Equity
(303,600)
101,300
Cash Flow Statement (quarterly)
PERIOD ENDING
Net Income
30-Sep-09
1,261,000
30-Jun-09
1,093,700
31-Mar-09
31-Dec-08
979,500
985,300
Operating Activities, Cash Flows Provided By or Used In
Depreciation
311,900
304,400
282,200
277,800
Adjustments To Net Income
54,000
42,600
85,200
159,300
Changes In Accounts Receivables
-
-
-
16,100
Changes In Liabilities
-
-
-
240,700
Changes In Inventories
-
-
-
Changes In Other Operating Activities
Total Cash Flow From Operating Activities
195,300
1,822,200
(20,600)
1,420,100
(216,200)
1,130,700
(11,000)
(197,900)
1,470,300
Investing Activities, Cash Flows Provided By or Used In
12
Capital Expenditures
(470,800)
Investments
9,800
Other Cashflows from Investing Activities
19,700
Total Cash Flows From Investing Activities
(441,300)
(434,400)
135,100
(3,600)
(302,900)
(413,700)
(713,700)
-
-
45,100
78,000
(368,600)
(635,700)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
(541,200)
(547,800)
(553,400)
(557,700)
Sale Purchase of Stock
(728,200)
(712,900)
(775,000)
(3,100)
276,900
467,100
308,100
41,600
60,500
(819,700)
(192,200)
Net Borrowings
Other Cash Flows from Financing Activities
Total Cash Flows From Financing Activities
-
(55,500)
(22,100)
(1,388,100)
(1,005,900)
Effect Of Exchange Rate Changes
47,600
70,600
(27,100)
(66,200)
Change In Cash and Cash Equivalents
$40,400
$181,900
($84,700)
$576,200
13