Mcdonalds

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McDonald’s Corporation
April 25, 2005

R.J. Reynolds………...Roufkes.A.Reynolds@ttu.edu
Andrew Spear……………...Drewspear@yahoo.com
Markie Stark………………… Starksisters@cox.net
Tyler Walbridge………... Tylerwttu@hotmail.com
Rob Watkins…………… Robert.B.Watkins@ttu.edu

Table of Contents
Executive Summary………………………………………. 4 Business and Industry Analysis…………………………. 7 Five Forces Model…………………………………….. 8 Key Success Factors…………………………………. 10 Accounting Analysis………………………………………. 12 Key Accounting Policies……………………………… 13 Potential Accounting Flexibility……………………….15 Accounting Strategies…………………………………. 15 Quality of Disclosure………………………………….. 18 Potential Red Flags……………………………………. 19 Undo Accounting Distortions………………………..... 19 Ratio Analysis and Forecasting…………………………… 20 Ratio Analysis………………………………………….22 Liquidity Charts……………………………………….. 24 Profitability Charts……………………………………. 28 Capital Structure Charts………………………………..34 Other Relevant Charts………………………………….36 Forecasting……………………………………………..38 Valuation Analysis………………………………………… 40 Method of Comparables………………………………. 40 Cost of Capital………………………………………… 43 Intrinsic Valuation Methods…………………………... 44 Summary of Valuation Results………………………... 49 Z-Score………………………………………………... 51 Appendix…………………………………………………... 52

Valuation of McDonald’s Corporation
Investment Recommendation: Market Outperform
MCD – NYSE (4/01/05)
52 Week Price Range

$31.00
$25.05 - $34.56

Revenue
Market Capitalization

1.27B

Dividend yield
3 month Avg Daily Trading Volume
Percent Institutional Ownership
Book Value Per Share (mrq)
ROE (most recent years)
ROA (most recent years)
Est. 5 year EPS Growth Rate

Kd
WACC (bt)





2004
$1.80

2005
$1.73

2006
$1.93

$19.06B
$39.37B

Shares outstanding

Cost of Capital Estimates
Ke Estimated
5-year Beta
3-year Beta
2-year Beta
Published Beta

EPS Forecast
FYE
EPS

Date: April 1, 2005

1.77%
4,411,000
73.04%
11.183
12.28%
5.76%
7.3%

Beta
0.87
1.30
0.96
0.79

Ke
5.81%
5.81%
7.12%
6.09%
5.57%
3.33%
5%

Valuation Ratio Comparison
Trailing P/E
Forward P/E
Forward PEG
M/B

2007
$2.15
Industry
Average
19.38
16.68
1.40
5.99

McDonald’s
17.15
14.46
1.82
14.77

Valuation Estimates
Actual Current Price

$31.00

Ratio Based Valuation
P/E trailing
P/E forwarding
PEG Forward
Dividend Yield
M/B
Ford Epic Valuation

$35.69
$35.53
1.82
$51.16
$66.99
$32.37

Intrinsic Valuation
Discounted Dividends
Free Cash Flows
Residual Income
Abnormal Earnings Growth
Long-Run Residual Income Perpetuity

$14.78
$28.79
$43.24
$42.04
$34.28

We rate McDonald’s as a MARKET OUTPERFORM. McDonald’s is noticeably undervalued according to our abnormal earnings and residual income models. McDonald’s has created some positive momentum over the past couple years with the implementation of its new revitalization plan. Currently, McDonald’s is continuing to streamline its operation and training processes as well as sustain its fiscal discipline. We project short-term revenue growth to gradually decline from 10%-11% in 2004 to 6%-7% in 2011 as the changes made during the revitalization have time to run their course.

Rating System:
BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMER: A recommendation to maintain current positions with returns expected to match the market. SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.

Executive Summary:
Recommendation—Undervalued Security:
After extensive research, analysis and valuation, it is found that McDonald’s corporation is currently an undervalued company and rated as a Market Outperform and thus we recommend this stock as a “Buy.”. McDonald’s has a long standing history of business, and has built a loyal...
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