McDonalds Valuation Project Write Up
To begin the economic analysis of McDonalds, we must first look at the company beta. McDonalds has a beta of .34 meaning it is not as volatile when compared to the market and can be categorized as a low risk stock. To determine that financial impact of changes in economic conditions to the performance McDonalds, three economic indicators must be evaluated. The leading economic index (LEI), coincident economic index (CEI), and lagging economic index (LAG), are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component. The LEI are indicators that change before the economy as a whole changes and is therefore a short-term predictor of the economy. The LEI or the U.S. increased 0.2 percent in October to 96.0, following a 0.5 percent increase in September, and a 0.4 percent decline in August. The LEI has shown improvement and gives a little hope in what can be expected, in terms of the economy, in the next few months. The CEI provides information about the current state of the economy. The CEI for the U.S. increased 0.1 percent in October to 104.8, following a 0.2 percent increase in September, and a 0.4 percent decline in August. From this information, the CEI tells us that the current economy is showing signs of improvement but again, nothing substantial. Lagging indicators tend to lag a quarter or two and change after the economy as a whole does. (LAG) increased 0.3 percent in October to 117.1, following a 0.1 percent decline in September, and a 0.4 percent increase in August. Because employment rate is a lagging indicator, the LAG index can be expected to increase in this slow economy. When analyzing the LEI, CEI, and LAG it can be determined that the economy will expand modestly into 2013, however, the negative effects of hurricane Sandy most likely are not factored into these indicators. The entire fast food industry is next to be examined, specifically through Porter’s 5 forces and ROIC. McDonalds has always thrived in the US and all throughout the world. There are more than 33,000 locations throughout the world and McDonalds plans to expand further. Burger King, a competitor to McDonalds, has less than 13,000 locations worldwide. It’s easy to see that McDonalds has an immediate advantage in the fast food industry through its vast numbers. Because of McDonald’s vast numbers and established image, the threat of new entrants in the fast food industry is very low (2), however, it is possible that a new chain could give McDonalds some competition. Supplier power is also fairly low (1.5) because the inputs that go into making McDonald’s food are inexpensive and can be bought from numerous suppliers. Similarly, the bargaining power of buyer is low (1.5) because McDonalds provides customers with food at a price that is attractive to anyone. On the other hand, the threat of substitutes is high (3.5) because with the growing problem of obesity, Americans are starting to make better decisions and realize the importance of eating healthy. McDonalds has tried to counter this by offering salads and fruit to attract health conscious customers but most customers that go to fast food restaurants are looking for a cheap filling meal and the thought of a salad coming from a fast food restaurant isn’t appetizing to most. The overall competitiveness of the fast food industry is very high (4) which has lead to similar prices and products across the industry. We all believe that most people go to fast food restaurants based on convenience and not so much because one chain is preferred over the other. Because McDonalds is almost everywhere you turn, it has the advantage in this aspect. In the next five years we do not expect too many changes in the 5 forces of the industry. We expect new entrants, suppliers, and buyers to remain roughly the same as the...
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