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McDonald’s

McDonald’s. Shivam Khanna Brandon McArthur March 3, 2009. Agenda. Macroeconomic Review Industry Overview McDonalds Overview Historical Performance Recent Events/Performance Financial Projections. Macroeconomic Overview. U.S GDP 4 th Quarter 2008 Down 6.2%

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McDonald’s

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  1. McDonald’s Shivam Khanna Brandon McArthur March 3, 2009

  2. Agenda • Macroeconomic Review • Industry Overview • McDonalds Overview • Historical Performance • Recent Events/Performance • Financial Projections

  3. Macroeconomic Overview U.S GDP 4th Quarter 2008 Down 6.2% Worst Economic Crisis since Great Depression Dow Jones Down about 50% from a year ago currently near 6,750 The Dow fell almost 12% in February S&P 500 fell 11%, its weakest February since 1933; Consumer Confidence & Unemployment at historic lows

  4. Fast Food Industry Focus on Convenience Heavily Saturated Market with a few large leaders Movement towards Franchising versus Company Owned McDonalds viewed as Market Leader (Market Cap: $58billion)

  5. McDonald’s Overview • Leading global foodservice retailer • Serves 52mm people a day in 100 countries • Headquartered in Oakbrook, IL • 31,967 restaurants in 118 countries, • 18,402 operated by franchisees; • 4,137 operated by affiliates; • 6,502 were operated by the company.

  6. Strategy • U.S Store Growth “Being Better Not Just Bigger” • Expanding product offerings • Healthier menu transition • McCafe Specialty Drinks • Increased franchising • Many company operated store are being franchised, especially in Europe • Decreases top line, increases margins

  7. Measuring Growth Systemwide Sales: sales at all restaurants, whether operated by the Company, by franchisees or by affiliates (6.9%) Comparable Sales: percent change in constant currency sales from the same period in the prior year for all restaurants in operation at least thirteen months, including those temporarily closed. Does not include Sales by franchisees and affiliates are not recorded as revenues by the Company (11%) Return on Incremented Invested Capital: evaluates the overall profitability of the business units, the effectiveness of capital deployed and the future allocation of capital

  8. Shareholder structure

  9. 5 Year Historical Performance

  10. Strengths Weaknesses • Uniform menu offerings can be mass produced, lowering production costs. • Bargaining power with suppliers lowers input costs and boosts margins. • Large advertising budget means lots of domestic and international exposure. • Viewed as Market Leader • Heavy Dependence on Commodity Cost (Beef, Chicken) • U.S Saturated Market Opportunities Threats • Currency Risks • Inability to create new products • Shift of consumer demand (health conscious) • Expansion of McCafe’s Specialty Drink Business • Store Growth Internationally (specifically china)

  11. Debt Financing Risk Management • Hedge Interest Rate Risks through Swaps • Forward Foreign Exchange contracts mitigate Currency Risk Unused 1.3B line of credit expiring in 2012 No plan to pay back debt before maturity Most of the Debt of is long term

  12. Computing Wacc Cost of Equity - Beta: 0.9 - Rf: 4% - (Rm – Rf): 6% - Ke: 9.4% Cost of Debt - Kd: 4.7% (Weighted average of all debt of company) Wd: 14.2% We: 85.8% Tax Rate: 35% WACC: 8.5%

  13. Computing WACC Return on Equity (experienced 2002-2007): 14.85% ke (from CAPM): 9.4% Average: 12.13% Spread: 2.72% New ke: 10.72% New WACC: 9.62% 9.4% 14.85% 12.13% 10.72%

  14. DCF Analysis

  15. Operating leases Company owns 45% of land and about 70% of buildings As of 31st December 2007, the company was the lessee at 13,322 restaurant locations

  16. Operating leases

  17. Operating leases • Franchise agreements also include a minimum rent payment that parallel the underlying leases and escalations

  18. Comparables McDonald’s Return on Equity: 30.10% Return on Assets: 13.58% P/E Ratio: 12.35 Payout Ratio: 42% Operating Margins: 26.71% Leverage Ratio: 15% Burger King Return on Equity: 22.18% Return on Assets: 8.38% P/E Ratio: 12.98 Payout Ratio: 18% Operating Margins: 13.70% Leverage Ratio: 26% • Yum Brands • Return on Equity: 187% • Return on Assets: 13.09% • P/E Ratio: 10.76 • Payout Ratio: 35% • Operating Margins: 12.7% • Leverage Ratio: 23.2% • Industry • P/E Ratio: 10.46 • Operating Margins:4.84%

  19. Company Margins EBIT margins - Company has witnessed a growth in margins from 13% in 2003 to 33% in 2008 Net Profit Margins - Company has witnessed an increase in margins from about 8%(2002) to 18.35%(2008) Company has a dividend payout ratio of approximately 42%

  20. Dividend Payout Ratio Is it sustainable? - Is it possible for the company to maintain this payout ratio assuming situation deteriorates? Yes - Out of the $5.8 billion paid out in 2008, $1.8billion was in the form of dividends - Company has raised dividend for 32 consecutive years - Company is evolving into a less capital intensive business - 2007 ending cash balance was $5billion. Steady cash flows will from franchisees - 2008 was a very tough year for markets and McDonald’s raised dividend in 4th quarter

  21. Outlook for McDonald's Company plans to evolve to a less capital intensive business with more stable cash flows - Company plans to re-franchise approximately 1000 stores by 2010 of which 675 were re-franchised in 2008. Results in a higher margin as a % of revenues Company plans capital outlay of approximately $2-$2.5 annually - $1billion o revamp existing stores and remaining for new stores

  22. Store growth

  23. Outlook for McDonald's Company planned to return $15-$17 billion worth of cash to shareholder’s between 2007-2009 - Till date company has returned approximately $11.5 billion - Company plans to purchase shares upto $10billion from public without a specific timeline. Purchased $4billion worth of stock in 2008 and $3.9billion worth of stock in 2007 Company increased dividend rate in 4th quarter of 2008 by 33% taking its annual dividend amount to $2

  24. Outlook for McDonald’s Company has seen increased margins from Franchisees - Up from 73% in 2003 to 82% in 2008 Company has witnessed strong double digit growth in China and India and views these markets as potential growth Has introduced a range of new breakfast/nutritious products that have achieved success and appealed to a new set of customers

  25. Outlook for McDonald's Company has seen strong growth in Europe especially at McCafe’s - Plans to add 200 McCafe’s in 2009 - Plans on doubling the number of 24hr open restaurants No immediate reason to raise debt - Has strong credit ratings - Most of debt is long term - Average borrowing cost of 4.7% Cheap prices help it benefit during a recession

  26. Risks Foreign Currency continues to be biggest risk for company - Approximately 65% of debt is in foreign denominated currency - Company has greatest exposure to Euro, GDP, Canadian Dollar, Australian dollar (approx 70% of all revenues) - If all the currencies changed by 10% in the same direction company’s annual net income would change by about 12-15 cents. Weak dollar in 2009 could negatively affect earnings Lawsuits Decline in demand; Failure to launch new products Rise in price of inputs

  27. Conclusion We recommend purchase of 200 Shares McDonald's at the current market price Stock Market has declined over 50% in 1 year and Mcd’s has fallen about 30%

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