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McDonald ’ s Corp. (MCD) - NYSE

McDonald ’ s Corp. (MCD) - NYSE. Patrick O ’ Donnell & Matthew Rasinski Thursday, April 11, 2013. Agenda. Introduction Company Overview Current Events Industry Overview Stock Performance Financial Analysis Valuation Recommendation. Introduction.

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McDonald ’ s Corp. (MCD) - NYSE

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  1. McDonald’s Corp. (MCD) - NYSE Patrick O’Donnell & Matthew Rasinski Thursday, April 11, 2013

  2. Agenda • Introduction • Company Overview • Current Events • Industry Overview • Stock Performance • Financial Analysis • Valuation • Recommendation

  3. Introduction • McDonald’s was founded in 1940 by Richard and Maurice McDonald in San Bernardino, California • It is the largest chain of hamburger fast fast food restaurants, serving 68 million customers daily in 119 countries • Ray Kroc purchased a franchise in 1955 and shorty after purchased the entire chain from the McDonald brothers • Headquarters – Oak Brook, Illinois, U.S.

  4. Company Overview • McDonalds operates over 34,000 restaurants worldwide • Employ over 1.7 million people • Notable for their 25 year consecutive dividend increase to shareholders – S&P 500 Dividend Aristocrats • More recently spun-off Chipotle Mexican Grill, Donatos Pizza, and Boston Market among others • Sector: Services, Industry: Restaurants

  5. Global Operations Wikimedia Commons

  6. Current Events • Management has shifted gears by catering to young adults rather then the familyfriendly market segment • No more play pens, baby seats, etc. • Super Size Me Legislation – restriction by Congress currently being debated pertaining to calorie intake • Drink size, burger, and fry reductions and reconfigurations • McDonalds are recently combating this negative press by including a healthy option • Fruit smoothies, yogurt, salad, whole vegetables and fruits

  7. New York Ban on Super-Sized Drinks washingtonexaminer.com

  8. Declining Soft Drink Sales • The overall trend for soft drinks is steadily declining • This is bad news for fast food restaurants considering drink sales are the most profitable segment on the menu dividendbuddy.com

  9. Labor Strikes • New York labor strikes on fast food chains are causing serious problems • High probability that minimum wages will rise in New York and across the nation CNN Money

  10. Equity Snapshot • Stock Price: $101.42 • Beta: .34 • 5 Year PEG Ratio: 1.87 • TTM P/E: 17.58 • Forward P/E: 17.57 • Div. Yield: 3%

  11. Industry Overview • McDonalds is far larger company then all its competitors in terms of sales and market cap

  12. McDonald's Market Share

  13. Stock Performance • McDonald’s performance from the purchase date of 2008 has a total yield of 96%, done handsomely as compared to its competitors

  14. Porter’s 5 Forces • Bargaining Power of Buyers: High • Many fast food chains to choose from both domestically and internationally • Bargaining Power of Suppliers: Low • Low quality food items are a commodity • Threat of New Substitutes: Moderate • Alternatives such as 1-minute meals, healthy living, are all driving forces that compete with the consumers’ wallet • Competitive Rivalry: High • Industry competes heavily with one another in terms of price and market share • Threat of New Entrants: Moderate • Emerging players may come from all walks of life, primary limiting factors are brick and mortar costs

  15. How Does MCD Make Money? • Company Operated Stores (40% total revenue) • Franchise Revenue (60% total revenue) • US (44% of total revenue) • Europe (24% of total revenue) • Asia/Pacific, Middle East, Africa (20% of total revenue) • Other (12% of total revenue)

  16. Is the Money Growing? • US Sales • Growth 3.3% • Customer Growth (1.9%) • Europe • Growth 2.4% • Customer Growth (-.5%) • APMEA • Growth 1.4% • Customer Growth (2.2%) • Other • Growth 7.7% • Customer Growth (3%)

  17. How does McDonalds make money? • Focus on balancing core menu classics with new products and promotional food events, such as Chicken McBites, Blueberry Banana Nut Oatmeal, and additional McCafe beverage offerings. • New product introductions were among the largest drivers of revenue growth in 2010 and 2011 (Note: These items had significantly high profit margins) • Target Customers: Medium Income Households (who spend roughly 40% of their food budget on dinning out) and 18 to 25 year olds (who spend nearly 46.4 of their food budget on dinning out)

  18. The Good, The Bad, The Questionable • The Good: APMEA geographic segment growth of 17.0% • The Bad: “Dollar Menu” incentives are not bringing in the growth the in sales as the company had relied on in the past. • The Questionable: “Angus” products are attempting to increase the quality of McDonalds products, however the lack of profit margin may cause the product to be abandon.

  19. Financial Projections • See Excel Model • Concerns: • Discount Rate • High ROE • Previous Valuation Errors

  20. RCMP • December 2008 Valuation: $49.63 • March 2009 Valuation: $63.27 • December 2009 Valuation: $66.87 • March 2010 Valuation: $77.95 • November 2010 Valuation: $77.55 • March 2011 Valuation: $73.83 • October 2011 Valuation: $93.05 • October 2012 Valuation: $95.81

  21. Recommendation: SELL • Sell 200 Shares at MKT Price • Stock maybe at peak price due to recent market exuberance • McDonalds does not seem to fit with the general portfolio goals of RCMP (its difficult to discover value in a stock covered my many analysts) • There is no shame in leaving the poker table on top • Our Gain: $9,810 (Increase of 93.54%)

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