alex florea steven kahan michael lavin eric xu yana zalukina carol zhou december 3, 2009
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Business OverviewWorld’s #1 fast-food chain by salesCompetitors:
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 SheetHeadquarters: 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 RestaurantsCounter and drive-through servicesLocations:
Stand-alone basis in cities and suburban areasConnected to gas stations/convenience storesShopping mallsWal-Mart storesTruck stops
Features indoor and outdoor playgrounds for children
Business Model25,975 (80.5%) operated by franchisees
and affiliates6,303 (19.5%) operated by the Company Collects from franchisees:
Initial investment feesRoyalties (% 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 OutlookMcDonald'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 OverviewIndustry 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 competitionLow level of concentration
Recent NewsSep. 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
McDonald's Corp.
Compared with Industry
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
Current Dividend Yield 3.50% Very High
Net Profit Margin Comp. Sales Growth
Sales per Restaurant ROE
www.wikinvest.com/stock.mcdonald’s_(MCD); November 30, 2009
Income Statement Assumptions
Forecast
2009 2010 2011-2014
Growth for company-operated sales
-1.00% 2.00% 7.00%
Growth for franchised revenues
2% 10% 12%
cost of good sold % of rev
62% 62% 62%
Growth of SG&A
2% 6% 6%
Income tax rate
30% 30% 30%
WACC Calculation
CAPM ROE
beta 0.61 21.42%
risk-free 3.50%
equity premium 5.50%
CAPM 6.83%
cost of debt 4.11%
Goal Post (40%,60%)
12.41%
Discounted Cash Flow2009E 2010E 2011E 2012E 2013E 2014E
FCF 3,181.70 3,570.74 3,941.22 4,462.02 5,049.50 5,708.95 Terminal Value
FCF Exit Multiple 20.52 117,139.70 Perpetuity Growth 62,471.19
Terminal Value 68,180.14
Discount Rate 12.41%
PV of FCF's 3,181.70 3,176.45 3,118.89 3,141.13 3,162.19 37,982.31 Sum of FCFs 53,762.67
DCF Valuation
Perpetuity
GrowthExit
MultiplePV of Firm 53,762.67 84,217.81 Less Net Debt 12,052.00 12,052.00 Equity Value of Firm 41,710.67 72,165.81 Shares Outstanding 1,079.19 1,079.19
Value per Share 38.65 66.87
Management AssessmentThe 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.
RecommendationHoldings in McDonald’s are currently 200
shares bought at $52.44Closing price on November 30, 2009 was
$63.25Using a triangulation of the methodologies,
the calculated intrinsic value is $61.05Qualitative factors:
MCD is a very attractive company The stock is at an all time highMCD might outperform the market and its
peers during a market correction. HOLDHOLD
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