zacks mcdonalds 09 12 (2)

7/28/2019 ZACKS Mcdonalds 09 12 (2)

1/6

2009 Zacks Investment Research, All Rights reserved. www.zacks.com

McDonald s Corporation (MCD-NYSE)

SUMMARY

SUMMARY DATA

Risk Level * Low

Type of Stock Large-GrowtIndustry Retail-RestaurantZacks Industry Rank * 167 out of 21

Current Recommendation NEUTRALPrior Recommendation OUTPERFORM

Date of Last Change 11/30/2009

Current Price (11/30/09) $63.25

Target Price $65.00

McDonald s global same-store sales continue grow maintaining healthy margins and ouperforming competitors. Earnings surpassed thZacks Consensus Estimate, and were up 10% yeover year. With a strong balance sheet anconsistent earnings, we think the stock providerelative safety and moderate growth prospects beinexposed to faster-growing international marketHowever, the economic headwind, which haaffected consumers disposable income, is impedingrowth. Moreover, the intense competition amonfast-casual restaurants to woo consumers maadversely affect its operating margins and profits. Asuch, we recommend a Neutral rating on the stock

52-Week High $64.5352-Week Low $50.86One-Year Return (%) 11.14Beta 0.65Average Daily Volume (sh) 7,879,387

Shares Outstanding (mil) 1,091Market Capitalization ($mil) $69,028Short Interest Ratio (days) 1.49

Institutional Ownership (%) 68Insider Ownership (%) 1

Annual Cash Dividend $2.20Dividend Yield (%) 3.48

5-Yr. Historical Growth RatesSales (%) 4.1Earnings Per Share (%) 18.3Dividend (%) 38.5

P/E using TTM EPS 16.6P/E using 2009 Estimate 16.0

P/E using 2010 Estimate 14.7

Zacks Rank *: Short Term1 3 months outlook 3* Definition / Disclosure on last page

ZACKS ESTIMATES

Revenue(In millions of $)

Q1 Q2 Q3 Q4 Year(Mar) (Jun) (Sep) (Dec) (Dec)

2007 5,293 A 5,839 A 5,901 A 5,754 A 22,787

2008 5,615 A 6,075 A 6,267 A 5,565 A 23,522

2009 5,077 A 5,647 A 6,047 A 5,873 E 22,644

2010 5,577 E 6,028 E 6,323 E 22,931

Earnings Per Share(EPS is operating earnings before non-recurring items)

Q1 Q2 Q3 Q4 Year

(Mar) (Jun) (Sep) (Dec) (Dec)

2007 $0.63 A $0.71 A $0.83 A $0.73 A $2.90 A

2008 $0.81 A $0.94 A $1.05 A $0.87 A $3.67 A2009 $0.83 A $0.97 A $1.15 A $1.00 E $3.95 E2010 $0.95 E $1.12 E $1.25 E $4.30 E

Zacks Projected EPS Growth Rate - Next 5 Years % 9

December 01, 2009
http://www.zacks.com/


2/6

Equity Research

Page 2

OVERVIEW

Founded in 1948, the Oak Brook, Illinois-based McDonald s Corporation (MCD) is a leading fast foochain operating 32,278 restaurants in over 118 countries as on September 30, 2009. The companmainly operates and franchises quick-service restaurants (QSRs) under the McDonald s brand. Of thtotal number of restaurants, 25,975 are operated by franchisees (including 3,095 operated bdevelopmental licensees, 4,081 operated by affiliates primarily in Japan, and 18,799 operated b

conventional franchisees), and the company operates 6,303 restaurants.

In 2008, McDonald s derived 70% of sales from its company-owned restaurants, and 30% through feefrom franchised and affiliated restaurants. The company s major markets are Australia, Europe, BrazCanada, China, France, Germany, Japan (a 50%-owned affiliate), the U.K., and the U.S. The EuropeU.S., and APMEA1 segments, respectively, account for approximately 42%, 34% and 18% of 2008 totarevenue. France, Germany and the United Kingdom collectively account for roughly 55% of Europerevenue. Australia, China and Japan collectively account for nearly 50% of APMEA s revenue.

In early April 2008, the company sold its minority ownership interest in the United Kingdom-based Pret-AManger for $229.4 million. In August 2007, the company sold its Boston Market chain to Sun CapitaPartners. During 2006, the company divested its entire ownership in Chipotle Mexican Grill.

Restaurant Geographic Locations

As on September 30, 2009

43%

21%

26%

10%

U. S. Europe APMEA Other Countries

REASONS TO BUY

McDonald s continues to grow same-store sales while maintaining healthy margins and ouperforming competitors. Global same-store sales rose 3.8% with the U.S. sales going up 2.5%Europe up 5.8% and Asia/Pacific, Middle East and Africa up 2.2% in the third quarter of 2009.

Even in the recession, McDonald's has remained largely unruffled by the slowdown and is planning taccelerate its expansion in India. The company plans to open 40 outlets in India during 2009 10

bringing the total to almost 200 restaurants. By 2015, the company targets to open 180-190 morrestaurants. The company currently operates 173 restaurants in India.

Management expects to refranchise 1,000 to 1,500 company-owned restaurants between 2008 an2010. From January 2008 to September 2009, the company had refranchised 970 restaurantsCurrently, 80% of total restaurants are franchised. Re-franchising a large chunk of its system wiprovide another engine for EPS growth and ROE expansion, in our opinion, as the company reduceits capital requirements.

1 Asia/Pacific, Middle East and Africa


3/6

Equity Research

Page 3

McDonald s has paid dividends for 33 consecutive years and has increased the dividend amounevery year. The company recently raised its quarterly dividend by 10%. In September 2007, thcompany announced its intention to return $15 billion to $17 billion to shareholders via dividend anshare repurchases from 2007 through 2009. This is nearly double that of $8 billion the companreturned between 2004 and 2006. From January 1, 2007 through September 30, 2009, the companhad returned $15.6 billion to shareholders.

REASONS TO SELL

The restaurant industry remains under pressure in the current economic downturn, which has badaffected consumers disposable income. The operators of fast-casual restaurants are reportindeclining traffic with consumers dining out less or preferring to eat at home.

The competition among fast-casual restaurants is expected to remain fierce with respect to priceservice, location, and concept in order to drive traffic, which may adversely affect the companyrestaurant operating margins and profits.

Due to high exposure to international markets, McDonald s remains prone to currency fluctuationThis may adversely affect the top and bottom lines. Management hinted that currency fluctuation

might lower its full-year earnings by $0.16.

RECENT NEWS

McDonald s Exceeds Zacks Estimates September 30, 2009

McDonald s Corporation recently reported third-quarter 2009 results that topped the Zacks ConsensuEstimate, driven by effective cost control and rise in comparable sales across all regions. McDonaldquarterly earnings came in at $1.15 per share, up 10% from $1.05 reported in the prior-year quarter, ansurpassed the Zacks Consensus Estimate of $1.11.

The strong U.S. dollar moderates the third-quarter results, trimming the earnings by $0.05 per shareExcluding foreign currency translation and gains, earnings increased 14% to $1.20 per share

Revenue for the quarter declined 4% to $6,046.7 million, but increased 2% in constant currenciesRevenue from company-operated restaurants declined 7% to $4,093.6 million, whereas revenue fromfranchise-operated restaurants increased by 5% to $1,953.1 million. Total operating income rose 6% t$1,932.8 million, but jumped 11% in constant currencies.

Despite a sinking global economy, McDonald s continues to grow same-store sales while maintaininhealthy margins by expanding market share. Global same-store sales rose 3.8% with the U.S. sales u2.5%, Europe up 5.8% and Asia/Pacific, Middle East and Africa (APMEA) up 2.2%. New menu products

including Angus Third Pounders and McCafe premium coffee line-up, boosted U.S. comps.

Total company-operated restaurant margins for the quarter expanded 70 basis points to 19.4%Restaurant margins increased 110 basis points to 19.3% in the U.S., 40 basis points to 20.4% in Europeand 100 basis points to 18% in APMEA, but dropped 20 basis points to 16.9% in Other Countrie(Canada and Latin America).

Recently, the company announced a 10% increase in its quarterly dividend, bringing the total quarterldividend to $0.55 per share. McDonald s has returned $1.3 billion to shareholders through dividends anshare repurchases during the quarter.


4/6

Equity Research

Page 4

McDonald s Exits Iceland:Effective November 1, 2009, McDonald s Corporation ceased operating three of its franchiserestaurants in Iceland due to a rise in the cost of ingredients used in the meals. The company had to stoimporting resources from Germany due to the strengthening of the euro and weakening of Icelandkrona, besides high taxes on imported foods, which almost doubled the cost of operations. Moreovepassing on increased costs to customers would have resulted in a 20% rise in menu price. Threstaurants were run by franchisee Jon Ogmundsson since 2004.

VALUATION

McDonald s Corporation s current trailing 12-month earnings multiple is 16.6X, compared to the 19.9industry average and 27.4X for the S&P 500. Over the last five years, McDonald s shares have traded a range of 13.9X to 21.6X trailing 12-month earnings. The stock is also trading at a discount to the peegroup, based on forward 2009 earnings estimates. We have a Neutral recommendation on the stock. Outarget price of $65.00, 16.5X 2009 EPS, reflects this view.

Key Indicators

P/EF1

P/EF2

Est. 5-YrEPS Gr%

P/CF(TTM)

P/E(TTM)

P/E5-YrHigh(TTM)

P/E5-YrLow

(TTM)McDonald s Corporation (MCD) 16.0 14.7 9.1 13.1 16.6 21.6 13.9

Industry Average 17.6 14.5 15.0 8.9 19.9 78.6 11.8S&P 500 18.9 15.4 10.7 11.5 27.4 26.6 13.8

Yum! Brands, Inc. (YUM) 16.3 14.9 11.6 11.0 16.5 24.3 13.8Starbucks Corporation (SBUX) 21.7 18.9 16.3 13.7 27.1 60.5 12.4

TTM is trailing 12 months; F1 is 2009 and F2 is 2010, CF is operating cash flow

P/BLastQtr.

P/B5-Yr High

P/B5-Yr Low

ROE(TTM)

D/ELast Qtr.

Div YieldLast Qtr.

EV/EBITDA (TTM)

McDonald sCorporation (MCD) 5.1 5.3 2.4 32.6 0.8 3.4 9.9

Industry Average 2.6 2.6 2.6 1.2 -1.7 0.4 12.9S&P 500 3.5 10.0 2.9 22.4 2.1


5/6

Equity Research

Page 5

Earnings Surprise and Estimate Revision History


6/6

Equity Research

Page 6

If you do not agree with our NEUTRAL recommendation for MCDRead why professional investors may have a different recommendation on the stock

Go to: http://www.stockresearchwiki.com/tiki-index.php?page=MCD/Ticker

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of MCD. Zacks EPS and revenue forecasts are not consensuforecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personviews as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectrelated to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in threport is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to methe particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as aoffer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for thsecurities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six ttwelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelv

months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. Thcurrent distribution of Zacks Ratings is as follows on the 861 companies covered: Outperform- 18.1%, Neutral- 75.5%, Underperform 6.2%Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The modassigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. ZackRank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness ofcompany s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eacstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highevalues and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thsecond, third, and fourth groups of stocks, respectively.
http://www.stockresearchwiki.com/tiki-index.php?page=MCD/Ticker

zacks mcdonalds 09 12 (2)

Documents