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Model Vs. Market

Model Vs. Market – McDonald’s

By August 17, 2015No Comments

In today’s Model Vs. Market post we’re looking at McDonald’s Corporation. McDonald’s has struggled to grow as competitors such as Chipotle and other “fast casual” competitors have captured market share with healthier menus and premium products.

Company Profile

McDonald’s Corporation is engaged in the global operation of McDonald’s restaurants and its franchises. Its menu spans breakfast, desserts and full meals (ala carte, combo) and includes hamburgers (Big Mac, Quarter Pounder with Cheese), Chicken McNuggets, chicken sandwiches, wraps, French fries, salads, oatmeal, shakes, McFlurry desserts and sundaes, among others. Its restaurants offer a substantially uniform menu across the world, with geographic variations to suit local preferences and tastes. Apart from company-operated restaurants, Its franchise business is offered under conventional franchise, developmental license or affiliate.

The firm’s direct operation spans the US, Europe, Asia Pacific, Middle East and Africa and it also operates a development license agreement covering 5,228 restaurants in more than 70 countries. The company was incorporated in 1964 and its headquarters are located in Oak Brook, Illinois. 

What is McDonald’s worth?

model_vs_market_chart_mcdonalds

Our DCF valuation model is indicating that shares of McDonalds are worth $73 which is 26% below its current market value. Here are the key assumptions used to arrive at this value:

  • Revenue Growth – Over the last 5 years revenue has grown at an average rate of 3.3%. The model assumes the same growth rate for the next 4 years followed by a terminal growth rate of 2.5%.
  • Profitability – Over the last 5 years the EBITDA margin has averaged 36.3%. The model assumes this same margin going forward.
  • Depreciation – Depreciation in 2014 was 6.0% of revenue. The model assumes this same rate of depreciation going forward.
  • Income Taxes – The average effective tax rate for the last 5 years was 32.1%. The model assumes this same effective tax rate going forward.
  • Capital Investment – Over the last 5 years the company has spent 8.9% of its revenue on capital investments, net of dispositions. The model assumes the same level of investment going forward.
  • Working Capital – After netting out cash, short-term investments and short-term debt the company operates with positive working capital. The model assumes this will continue at the same rate as revenue grows.
  • Discount Rate – The assumed cost of equity is 10% and the assumed cost of debt is 3.5% over the 10-year U.S. treasury rate. The company’s weighted average cost of capital is estimated at 9.27% in the model. Reducing the cost of equity to 8% increases the valuation to $105 per share.

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This model was created by extrapolating the last 5 years of performance into the next 5 years of performance. Before making an investment decision you should run your own model with your own assumptions based on your own research of the company. Download this model to perform your own valuation and let us know what you think shares of the company are worth on Twitter @tagnifi.


Disclaimer: The information on this web site is not intended to provide investment, tax, or legal advice, and nothing on the site should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by TagniFi or any third party. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.