April Hahnfeld Analyst
July 18, 2010
Porter’s 5 Forces:
• • • • • • • • • • • • • • Threat of Competition: High Threat of New Entrants: High Threat of Substitution: Low-Moderate Power of Suppliers: Low Power of Buyers: Low
Pros: Ticker Exchange Industry Sector Classification Market Cap. 52 Week Price range Recent Price Current P/E Projected 2012 P/E 2009 EPS Projected 2012 EPS Dividend Yield Debt Rating Beta MCD NYSE Retailing - Foods Consumer Services Income & Capital Appreciation $71,153 M $53.88 - $71.84 $69.22 (7/9/2010) 15.59 14.27 $3.98 $ 3.33% AA0.61 Best profit margin in the industry Moderate Leverage Good dividend yield and earnings growth Attractive per-share earnings growth due to large share repurchases Significant internal exposure and shareholder focus
Commodity cost risks Extremely competitive industry High food, energy, and labor cost concerns Product failures
McDonald’s Corporation’s principal activity is to franchise and operate McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, valuepriced menu in more than 100 countries worldwide. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and foreign-affiliated markets and developmental licensees under license agreements. Independently-owned and operated distribution centers, approved by the Company, distribute products and supplies to most McDonald’s restaurants. In addition, restaurant personnel are trained in the storage, handling and preparation of products and in the delivery of customer service. In February 2009, the Group sold its interest in Redbox Automated Retail, LLC. 1
The EIF currently has 3.64% of equity assets invested in McDonald’s. The stock falls within the Retailing-Food industry of the Consumer Discretionary sector and is classified as an Income & Capital Appreciation stock with a dividend yield of 3.3%. MCD accounts for 37.7% of Consumer Discretionary holdings. The sector comprises 10.96% of the S&P 500 Index and the EIF has a 7% target weighting for summer 2010. The EIF is currently 3.37% underweight the summer 2010 Income & Capital Appreciation target weighting of 30%.
CURRENT INDUSTRY OUTLOOK Over the five years to 2015, industry revenue is expected to increase at an average rate of 2.5%. The industry will show its first signs of growth in 2010, and then the industry will resume its long term growth trend from 2011 onward. Aggressive competition is likely to continue over the next five years. This will involve significant price-based competition; and increasing emphasis on the regular introduction of new products, including healthy-eating ones; and a move away from standard products by allowing some menu and meal choices by customers. Most fast food chains will introduce new healthy food alternatives and expand their current product line. They are also diversifying into areas, such as cafes and full service restaurants, but operating under different brands, through multi-branding concepts at both existing and new locations. Many domestic operators will continue to seek international expansion opportunities. International expansion is expected to be the largest source of revenue and profit growth for major players over the next five years. Consolidation among operators has been occurring for some time and is expected to continue, though new growth opportunities will offset those losses. Over the next five years, the number of establishments is expected to increase. Over the same period, industry employment is projected to grow and will be partially inflated by the increasing use of casual employees to meet peak customer service periods. Over the next five years, there is expected to only be a marginal improvement in industry profitability due to the...
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