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 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.

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

Global Operations Wikimedia Commons

Current Events Management has shifted gears by catering to young adults rather then the family friendly 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

New York Ban on Super-Sized Drinks washingtonexaminer.com

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

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

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%

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

McDonald's Market Share

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

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

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)

Is the Money Growing? US Sales Europe APMEA Other 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%)

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)

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.

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

RCMP December 2008 Valuation: $49.63 March 2009 Valuation: $63.27 November 2010 Valuation: $77.55 March 2011 Valuation: $73.83 October 2011 Valuation: $93.05 October 2012 Valuation: $95.81

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%)