1. McDonald’s Corp. (MCD) - NYSE
Patrick O’Donnell & Matthew Rasinski
Thursday, April 11, 2013

2. Agenda Introduction Company Overview Current Events Industry Overview
Stock Performance
Financial Analysis
Valuation
Recommendation

3. 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.

4. 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

5. Global Operations
Wikimedia Commons

6. 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

7. New York Ban on Super-Sized Drinks
washingtonexaminer.com

8. 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

9. 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

10. Equity Snapshot Stock Price: $101.42 Beta: .34 5 Year PEG Ratio: 1.87
TTM P/E: 17.58
Forward P/E:
Div. Yield: 3%

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

12. McDonald's Market Share

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

14. 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

15. 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)

16. 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%)

17. 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)

18. 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.

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

20. 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

21. 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%)