Sep. 24

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Alex Florea
Steven Kahan
Michael Lavin
Eric Xu
Yana Zalukina
Carol Zhou
December 3, 2009
Business Overview
 World’s #1 fast-food chain by sales
 Competitors:




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:







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
 32,278 restaurants in 118 countries (as of September 30,
2009):
 Serves 47 million customers daily
 Employs over 1.5 million 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
 25,975 (80.5%) operated by franchisees and affiliates
 6,303 (19.5%) operated by the Company
 Collects from franchisees:
 Initial investment fees
 Royalties (% of sales)
 Rent (% of sales)
 Supply food and materials to restaurants through approved
3rd parties
Geographical Revenue Breakdown

APMEA: Asia/Pacific, Middle East and Africa

Other Countries and Corporate: includes operations in Canada and Latin America, as well as Corporate activities
Macroeconomic Outlook
 McDonald's looks to 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.
 60% of sales occur outside of the United States.
 Changes in consumer preferences could decrease sales.
 Consumer preferences continue to gravitate towards more nutritional
food.
 Commodity Costs can Impact Margins.
 Since 2005, food prices have increased substantially, but competition
has prevented McDonald's from passing costs along to customers.
Thus, increasing input prices have come at the expense of margins.
 Sensitive to the Dollar.
 Higher translated value.
Industry Overview
 Industry performance continued to be battered by economic




recession.
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
SWOT Analysis
5-Year Historical Performance
http://www.google.com/finance?q=mcd; Nov 24, 2009
Recent News
 Sep. 24: raised quarterly cash dividend by 10%; (McDonald's has
raised its dividend each and every year since paying its first dividend in 1976)
 Oct. 22: third quarter sales in every area of the world
increase by around 2%-3%
 Nov. 13: Chicago Tribune News (compete in low-price
market; lower gross margin at least in a short term period)
Ratio Analysis
Compared with
Industry
McDonald's Corp.
2004
2005
2006
2007
2008
Comp. Sales Growth
6.90%
3.90%
5.70%
6.80%
6.90%
Very High
Sales per Restaurant
1.56M
1.67M
1.83M
2.40M
2.55M
High
Net Profit Margin
11.94%
12.68%
16.39%
10.53%
18.34%
Very High
Current ROE
32.90%
Average
3.50%
Very High
Current Dividend Yield
Net Profit Margin
Sales per Restaurant
Comp. Sales Growth
ROE
www.wikinvest.com/stock.mcdonald’s_(MCD); November 30, 2009
Income Statement Assumptions
Forecast
2009
2010
2011-2014
-1.00%
2.00%
7.00%
2%
10%
12%
62%
62%
62%
2%
6%
6%
30%
30%
30%
Growth for company-operated sales
Growth for franchised revenues
cost of good sold % of rev
Growth of SG&A
Income tax rate
WACC Calculation
CAPM
ROE
beta
0.61
risk-free
3.50%
equity premium
5.50%
CAPM
6.83%
cost of debt
4.11%
Goal Post (40%,60%)
12.41%
21.42%
Discounted Cash Flow
FCF
Terminal Value
FCF Exit Multiple
Perpetuity Growth
Terminal Value
Discount Rate
2009E
3,181.70
2011E
3,941.22
2012E
4,462.02
20.52
2013E
5,049.50
2014E
5,708.95
117,139.70
62,471.19
68,180.14
12.41%
PV of FCF's
Sum of FCFs
3,181.70
DCF Valuation
Perpetuity
Growth
PV of Firm
53,762.67
Less Net Debt
12,052.00
Equity Value of Firm
41,710.67
Shares Outstanding
1,079.19
Value per Share
2010E
3,570.74
38.65
Exit
Multiple
84,217.81
12,052.00
72,165.81
1,079.19
66.87
3,176.45
3,118.89
3,141.13
3,162.19 37,982.31
53,762.67
Football Chart
P/S
P/B
P/E
DCF
$-
$50
$100
$150
$200
$250
Management Assessment
 The management has been consistent in its dividend policy: till
date company has returned approximately $11.5 billion.
 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 focus on 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.
Recommendation
 Holdings in McDonald’s are currently 200 shares bought at
$52.44
 Closing price on November 30, 2009 was $63.25
 Using a triangulation of the methodologies, the calculated
intrinsic value is $61.05
 Qualitative factors:
 MCD is a very attractive company
 The stock is at an all time high
 MCD might outperform the market and its peers during a
market correction.
 HOLD
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