Alex Florea
Michael Lavin
Andrew Lee
Victor Murthi
Wei Yan
March 11, 2010
Business Overview
 World’s #1 fast-food chain by sales
 Competitors:
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
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
Burger King Holdings, Inc.
Yum! Bands, Inc. (KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W )
Wendy’s International, Inc.
Doctor's Associates, Inc. (Subway)
 Products:






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Hamburgers
Chicken sandwiches and products
French fries
Breakfast items
Salads
Soft drinks
Desserts
Source: http://www.adamseal.com/Portfolio/?p=261 (Assessed Nov. 15, 2009)
Fact Sheet
 Headquarters: Oak Brook, Illinois
 32,478 restaurants in 117 countries (as of Dec. 31, 2009):
 Serves 58 million customers daily
 Employs 385,000 people
Types of Restaurants
 Counter and drive-through services
 Locations:
 Stand-alone basis in cities and suburban areas
 Connected to gas stations/convenience stores
 Shopping malls
 Wal-Mart stores
 Truck stops
 Features indoor and outdoor playgrounds for children
Business Model
 26,216 (80.72%) franchisee and affiliate operated stores
 6,262 (19.28%) company operated stores
 Collects from franchisees:
 Initial investment fees
 Royalties (% of sales)
 Rent (% of sales)
 Supply food and materials to restaurants through approved
3rd parties
Franchising
 Down payment (Min. net worth of $.5MM)
 25% for existing stores
 40% for new locations
 Financing
 Established relations with banks facilitate loan
 Ongoing Fees
 4% of Sales
 Rent: Monthly base rent + % of Sales
Geographical Revenue Breakdown
Other
APMEA 5%
(Asia/Pacific,
Middle East,
Africa)
19%
International Revenue
United States
35%
Europe
41%
Macroeconomic Outlook
 Compete in the high-margin beverages market with "McCafe”
 Separate niches with McDonald's being the better value proposition and
Starbucks offering more of a quality experience
 Strong International Growth is Driving Sales
 65% of sales occur outside of the United States
 Changes in consumer preferences
 Consumer preferences continue to gravitate towards healthy meals
 Providing free Wi-Fi in all U.S. outlets
 Commodity Costs can Impact Margins
 Since 2005, food prices have increased substantially, but competition has
prevented McDonald's from passing costs along to customers
 Sensitive to the Dollar
 Higher translated value
Industry Overview
 The current economic environment has increased consumer





focus on value, heightening pricing pressures across the
industry
Higher commodity prices are driving increases in food costs.
Society's increasing awareness of the health risks associated
with a high fat, salt and sugar diet.
Total market saturation
Intense competition
Low level of concentration
Major Players
* Source: WikiInvest – McDonald’s on Feb. 21 2010
SWOT Analysis
Strengths:
Weaknesses:
 Viewed as market leader
 Heavy dependence on commodity cost
 Bargaining power with suppliers lowers
input costs and boosts margins
(chicken, beef)
 U.S. is becoming a saturated market
 Branded affordability, menu variety, and
beverages
 Expansion and ongoing reinvestment
 Management practices and controls
Opportunities:
Threats:
 Growing beverage category (McCafe,
 Currency risk
smoothies and frappes in 2010)
 Breakfast menu
 International expansion (China, Russia,
India)
 Shift in consumer demand (health
conscious)
5-Year Historical Performance
* Source: Yahoo Finance – McDonald’s on Feb. 21 2010
Recent News
 March. 15 (Future): Dividend payment of $0.55 / share
 Feb. 10: Increases in comparable store sales growth for 2009
 2.6% increase for United States – driven by continued focus on classic menu
favorites, dollar menus, McCafe, and Angus Burger
 5.2% increase for Europe
 3.4% increase for APMEA
 Jan. 22: Announced 2009Q4 EPS results of $1.03 (Analyst consensus $1.02)
 Dec. 30: Unexpected departure of No.2 executive, Ralph Alvarez due to health
concerns
Management’s Outlook for 2010
 Remain focused on “better, not just bigger” strategy
 Further differentiate brand, increase customer visits, and grow market share through:
 Service enhancements
 Restaurant reimaging (about half of the $2.4 billion of planned 2010 capital
expenditures)
 Menu innovation
 Commodity costs are expected to be relatively flat, but fluctuations between quarters
 SG&A are expected to remain relatively flat
 Interest expense is expected to increase slightly compared to 2009
 Other half of $2.4 billion CapEx is for the opening of 1,000 new restaurants
 Close 430 restaurants in Japan; tax impairment charges of $40-$50 million
We are confident that management will execute these strategies while
remaining disciplined in operations and financial management
Key Strategies
 U.S. Strategies:
 Strengthen core menu and value offerings
 Aggressively pursue new growth opportunities in chicken, breakfast, beverages, and
snacking options
 Planned introduction of smoothies and frappes in mid-2010
 Europe Strategies:
 Focus on building market share by:
 Upgrading restaurant ambiance by end of 2011 (mostly in France and U.K)
 Leverage technology such as self-order kiosks, hand-held ordering devices, and
drive-thru
 Marketing initiatives
 APMEA Strategies:
 Market convenience, core menu, and branded affordability
Five-Step DuPont Analysis
2004
2005
2006
2007
2008
2009
EBIT/Sales (operating profit margin)
21%
21%
22%
24%
27%
29%
Sales/Assets (asset turnover)
Interest/Assets (interest expense
rate)
67%
64%
72%
78%
83%
75%
1%
1%
1%
1%
2%
2%
196%
198%
187%
192%
213%
215%
1-tax (tax retention rate)
71%
70%
69%
65%
70%
70%
ROE
13%
12%
15%
18%
20%
19%
Assets/Equity (equity multiplier)
Net Profit Margin
Sales per Restaurant
Comp. Sales Growth
ROE
Income Statement Assumptions
Forecast Assumptions
Growth for company-operated sales
Growth for franchised revenues
COGS Margin
SG&A Margin
2010
2011
2012-2015
2.00%
5.00%
7.00%
10%
11%
12%
62%
62%
62%
9%
9%
9%
30%
30%
30%
Income tax rate
WACC Calculation
Cost of Equity ROE
ROE
CAPM WACC =
ROE WACC =
16.96%
21.32%
40%
Cost of Equity CAPM
beta
5.04%
0.60
risk-free
2.42%
equity premium
5.50%
CAPM
5.71%
Cost of Debt
4.11%
Triangulation
=
12.19%
60%
Discounted Cash Flow
FCFF
3,335.24
3,882.20
4,395.34
4,880.06
5,415.93
6,008.41 6,969.22
Terminal Value
FCF Exit Multiple
134,155.
21
75,794.5
9
19.25
Perpetuity Growth
Discount Rate
12.19%
PV of FCF's
3,335.24
Sum of FCFs
3,460.23
3,491.77
3,455.46
3,418.07 46,015.50
63,176.28
DCF Valuation
Perpetuity Exit
Growth Multiple
PV of Firm
63,176.28 96,005.06
Less Net Debt
12,052.00 12,052.00
Equity Value of Firm
51,124.28 83,953.06
Shares Outstanding
1,077.00 1,077.00
Value per Share
47.47
77.95
Public Comparables Analysis
Triangulation & Football Chart
P/S
P/B
P/E
DCF
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Value Triangulation
Method
DCF-Perpetuity Growth
DCF-Terminal Value
P/E Multiple
P/B Multiple
P/S Multiple
Weighted Per Share Value
Value
Weight
47.47
77.95
67.11
70.56
68.10
Value
25%
20%
25%
25%
5%
11.87
15.59
16.78
17.64
3.40
65.28
Management Assessment
 The management has been consistent in its dividend policy: In 2009, the
company returned $5.1B to shareholders through a combination of shares
repurchased and dividends paid, bringing the three-year total to $16.6B
(consistent with management’s $15B - $17B target).
 Management reviews and analyzes business results in constant currencies
however we believe the company has been conservative in hedging the currency
risk.
 Management continues to evaluate opportunities to optimize the mix of
franchised and company-owned operations to boost the competitive margin.
 McCafe had met sales expectations and has benefited from the high level of
advertising that McDonald's has committed to it. Coffee sales now make up 5%
of McDonald's total sales. We are confident that similar attention will be
devoted to developing the rollout of more beverages in 2010.
Recommendation
 Holdings in McDonald’s are currently 200 shares bought at
$52.44
 Closing price on March 10, 2010 was $64.94
 Using a triangulation of the methodologies, the calculated
intrinsic value is $65.28
 Qualitative factors:
 MCD is a very attractive company with strong management
 The stock is at an all time high
 MCD might outperform the market and its peers during a
market correction
 HOLD, but buy 100 shares if price falls to $60.00