1. McDonald’s Corporation
Financial Analysis
By Brenda Hudson, John Doe and Mary Smith
BUS307 Research Project

2. McDonald’s Business Overview
Largest fast food restaurant operator
Serves 47 + million people daily
31,xxx restaurants in 121 countries
23,xxx are company-owned
7,8xx are franchised or affiliated
System-wide sales of $33 + billion

3. McDonald’s Income Statement
2003 Revenues of $17.14 billion
11.3% increase of which 5% was true revenue growth
Company-owned store revenue
$12,795.4 million
74.7% of total
Franchises/affiliates revenue
$4,345.1 million
25.3% of total

4. McDonald’s Income Statement
Net Income went up 65.7%
Revenues up by 11.3%
Operating Costs and Expenses up by only 7.6%
Total Op. Costs and Exp. – 83.5% of Revenue
Most expenses increased by %
SG&A increased by only 7%
Net Income beats industry
McDonalds Profit Margin = 8.6%
Industry Profit Margin = 7.24%
Wendy’s Profit Margin = 7.5%

5. McDonald’s Balance Sheet
2003 Total Assets of $ billion up by 6.5%
Current Assets up 9.9% led by:
Cash up 49.2%
Prepaid Expenses & Other Current Assets up by 26.5%
Accounts & Notes Receivable down by 14.1%
Largest Current Asset
McDonald’s Current Assets are 7.4% of Total Assets vs. Wendy’s (14.6%)

6. McDonald’s Balance Sheet
2003 Total Assets of $ billion up by 6.5%
Net Property and Equipment
Largest Asset, Fixed Asset
78.1% of assets (compare to Wendy’s (68.1%))
Increased 7.2%
Long-term Debt
Largest Liability
36.6% of assets (compare to Wendy’s (21.9%))
Decreased by 3.7%

7. McDonald’s Ratio Analysis
Current Ratio
McDonald’s: vs. Industry: vs. Wendy’s 0.87
Quick Ratio
McDonald’s: vs. Industry: vs. Wendy’s 0.56
High Inventory Turns – Better than comparables
McDonald’s: x vs. Industry: 41.0x vs. Wendy’s 39.05x
Days Sales Outstanding:
15.4 days down 4.6 days from 2002
Receivables Turns – Lower than comparables
McDonald’s x/yr Vs. Industry: 36.8x/yr vs. Wendy’s 29.83x/yr

8. McDonald’s Ratio Analysis
Lower Total Asset Turns:
McDonald’s: vs. Industry: vs. Wendy’s
Higher Debt Ratio:
McDonald’s: % vs. Industry: % vs. Wendy’s %
Higher Profit Margin:
McDonald’s: 8.6% vs. Industry: 7.24% vs. Wendy’s 7.5%
BEP, ROA, ROE trending up, but well below industry and competition
Price/Earnings is lower than industry, higher than Wendy’s
McDonald’s: vs. Industry: vs. Wendy’s: 20.65

9. McDonald’s Beta, Required Return & Stock Price
Wendy’s beta = 0.363, Yum! Brands = 0.426, Restaurant Industry Beta = 0.57
Cross-Industry Market Norm = 1
McDonald’s σ of 10 years past returns = 40.1%

10. McDonald’s Beta, Required Return & Stock Price
McDonald’s Required Rate of Return
Security Market Line (SML) – 11.2%
Capital Market Line (CML) – 18.9%
Average Required Return= 15.05%
Sources:
KRf = 5.7% (long-term government bond yield)
KM = 12.7% (Long term yield on Large Stocks ( ))
Market σ of 10 years past returns = 21.05%
McDonald’s σ of 10 years past returns = 40.1%

11. McDonald’s Beta, Required Return & Stock Price
McDonald’s Target Stock Price
Four Methods:
Price Earnings – Average = $44.37
Market Book – Average = $32.9
Gordon Dividend Growth Model = $7.46
Ben Graham Model – $24.24
Average Target Price is $32.20.
Excluded Gordon Dividend Cost

12. McDonald’s Debt Current Liabilities up by 2.6%
$9.7 billion in Long-term debt (including current maturities)
3% decrease from 2002
16 bonds maturing from 2004 to 2033 at coupon rates of 4.15% to 8.875%
Weighted Average Interest Rate on total debt = 4.1%
Long Term Debt Ratings:
Moody’s: A2, S&P: A, Fitch A
Interest Expense up by 3.7% to 388 million

13. McDonald’s Stock & Dividend History
Public since 1966
Market Cap = $36.6 billion
Modest dividend strategy
Current dividend is 40¢ / year
Dividend increased 70% in 2003
Increased 29 times since 1976
Twelve Stock Splits
Average annual stock appreciation of 20.8%
Stock Repurchase of $439 million in 2003 (18.9 million shares)

14. McDonald’s Improvement Strategies
Undertaking “Revitalization” Strategy
Reduce Operational Expenses
Reduce SG&A – dollars toward systems, menu expansion, training
Asset Management and Utilization
Reduce net capital spending
Close underperforming restaurants
Cautious expansion
Increase same-restaurant sales
Hedges are planned to combat weak foreign currencies
Strategies for PR and food safety in light of mad cow disease in some areas
Tighten Quality Control within franchises
Expand Partner Brands – be own competitor
Cross-sell other products in restaurants

15. McDonald’s Summary & Our Recommendations
McDonald’s is restaurant segment leader – 40% domestic quick-service restaurant market share
Generates tremendous cash flow
(Over $2 billion in 2003)
Growth possibilities
They are beyond high growth phase in US, but still room for same-restaurant improvement and new restaurants in some US markets
Continue to replicate US success internationally
Fast food restaurant market segment in trouble, but McDonald’s is the leader in this segment.