McDonald’s Corp Valuation – April 2019 #MCD

Company Profile (excerpt from Reuters): McDonald’s Corporation (McDonald’s), incorporated on December 21, 1964, operates and franchises McDonald’s restaurants. The Company’s restaurants serve a locally relevant menu of food and drinks sold at various price points in over 100 countries. The Company’s segments include U.S., International Lead Markets, High Growth Markets and Foundational Markets and Corporate. McDonald’s franchised restaurants are owned and operated under various structures, including conventional franchise, developmental license or affiliate. The Company is primarily a franchisor. Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and decor.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MCD – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $145,486,766,371 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.36 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 43.92% Pass
6. Moderate PEmg Ratio PEmg < 20 27.19 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -23.60 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.36 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 28.78 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $6.99
MG Growth Estimate 5.72%
MG Value $139.32
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $101.36
MG Value based on 0% Growth $59.42
Market Implied Growth Rate 9.35%
Current Price $190.08
% of Intrinsic Value 136.43%

Mcdonald’s Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.06 in 2015 to an estimated $6.99 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.35% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Mcdonald’s Corp revealed the company was trading above its Graham Number of $0. The company pays a dividend of $4.19 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 27.19, which was below the industry average of 34.9, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-45.07.

Mcdonald’s Corp receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$45.07
Graham Number $0.00
PEmg 27.19
Current Ratio 1.36
PB Ratio -23.60
Current Dividend $4.19
Dividend Yield 2.20%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $4,053,200,000
Total Current Liabilities $2,973,500,000
Long-Term Debt $31,075,300,000
Total Assets $32,811,200,000
Intangible Assets $2,331,500,000
Total Liabilities $39,069,600,000
Shares Outstanding (Diluted Average) 776,900,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.98
Dec2018 $7.54
Dec2017 $6.37
Dec2016 $5.44
Dec2015 $4.80
Dec2014 $4.82
Dec2013 $5.55
Dec2012 $5.36
Dec2011 $5.27
Dec2010 $4.58
Dec2009 $4.11
Dec2008 $3.76
Dec2007 $1.98
Dec2006 $2.83
Dec2005 $2.04
Dec2004 $1.79
Dec2003 $1.15
Dec2002 $0.70
Dec2001 $1.25
Dec2000 $1.46
Dec1999 $1.39

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.99
Dec2018 $6.26
Dec2017 $5.55
Dec2016 $5.15
Dec2015 $5.06
Dec2014 $5.17
Dec2013 $5.22
Dec2012 $4.91
Dec2011 $4.43
Dec2010 $3.83
Dec2009 $3.28
Dec2008 $2.74
Dec2007 $2.14
Dec2006 $2.05
Dec2005 $1.56
Dec2004 $1.31
Dec2003 $1.11

Recommended Reading:

Other ModernGraham posts about the company

McDonald’s Corp Valuation – November 2018 $MCD
McDonald’s Corporation Valuation – February 2018 $MCD
5 Overvalued Dow Components – December 2016
McDonald’s Corp Valuation – November 2016 $MCD
5 Overvalued Dow Components – July 2016

Other ModernGraham posts about related companies

Chipotle Mexican Grill Inc Valuation – March 2019 #CMG
Darden Restaurants Inc Valuation – March 2019 #DRI
Yum Brands Inc Valuation – February 2019 $YUM
Starbucks Corporation Valuation – January 2019 $SBUX
McDonald’s Corp Valuation – November 2018 $MCD
Sonic Corp Valuation – August 2018 $SONC
Jack in the Box Inc Valuation – July 2018 $JACK
Chuy’s Holdings Inc Valuation – July 2018 $CHUY
Chipotle Mexican Grill Inc Valuation – June 2018 $CMG
Darden Restaurants Inc Valuation – May 2018 $DRI

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corp Valuation – November 2018 $MCD

Company Profile (excerpt from Reuters): McDonald’s Corporation (McDonald’s), incorporated on December 21, 1964, operates and franchises McDonald’s restaurants. The Company’s restaurants serve a locally relevant menu of food and drinks sold at various price points in over 100 countries. The Company’s segments include U.S., International Lead Markets, High Growth Markets and Foundational Markets and Corporate. McDonald’s franchised restaurants are owned and operated under various structures, including conventional franchise, developmental license or affiliate. The Company is primarily a franchisor. Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and decor.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MCD – November 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $145,532,372,247 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.53 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 38.54% Pass
6. Moderate PEmg Ratio PEmg < 20 29.98 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -21.53 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.53 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 16.56 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $6.26
MG Growth Estimate 3.17%
MG Value $92.85
Opinion Overvalued
MG Grade B
MG Value based on 3% Growth $90.74
MG Value based on 0% Growth $53.19
Market Implied Growth Rate 10.74%
Current Price $187.59
% of Intrinsic Value 202.04%

Mcdonald’s Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.17 in 2014 to an estimated $6.26 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.74% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Mcdonald’s Corp revealed the company was trading above its Graham Number of $0. The company pays a dividend of $3.83 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 29.98, which was below the industry average of 31.54, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-45.27.

Mcdonald’s Corp performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$45.27
Graham Number $0.00
PEmg 29.98
Current Ratio 1.53
PB Ratio -21.53
Current Dividend $3.83
Dividend Yield 2.04%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $5,553,100,000
Total Current Liabilities $3,626,700,000
Long-Term Debt $31,895,200,000
Total Assets $34,053,700,000
Intangible Assets $2,345,000,000
Total Liabilities $40,846,300,000
Shares Outstanding (Diluted Average) 779,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.53
Dec2017 $6.37
Dec2016 $5.44
Dec2015 $4.80
Dec2014 $4.82
Dec2013 $5.55
Dec2012 $5.36
Dec2011 $5.27
Dec2010 $4.58
Dec2009 $4.11
Dec2008 $3.76
Dec2007 $1.98
Dec2006 $2.83
Dec2005 $2.04
Dec2004 $1.79
Dec2003 $1.15
Dec2002 $0.70
Dec2001 $1.25
Dec2000 $1.46
Dec1999 $1.39
Dec1998 $1.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.26
Dec2017 $5.55
Dec2016 $5.15
Dec2015 $5.06
Dec2014 $5.17
Dec2013 $5.22
Dec2012 $4.91
Dec2011 $4.43
Dec2010 $3.83
Dec2009 $3.28
Dec2008 $2.74
Dec2007 $2.14
Dec2006 $2.05
Dec2005 $1.56
Dec2004 $1.31
Dec2003 $1.11
Dec2002 $1.12

Recommended Reading:

Other ModernGraham posts about the company

McDonald’s Corporation Valuation – February 2018 $MCD
5 Overvalued Dow Components – December 2016
McDonald’s Corp Valuation – November 2016 $MCD
5 Overvalued Dow Components – July 2016
McDonald’s Corporation Valuation – May 2016 $MCD

Other ModernGraham posts about related companies

Sonic Corp Valuation – August 2018 $SONC
Jack in the Box Inc Valuation – July 2018 $JACK
Chuy’s Holdings Inc Valuation – July 2018 $CHUY
Chipotle Mexican Grill Inc Valuation – June 2018 $CMG
Darden Restaurants Inc Valuation – May 2018 $DRI
Yum Brands Inc Valuation – April 2018 $YUM
Starbucks Corporation Valuation – March 2018 $SBUX
McDonald’s Corporation Valuation – February 2018 $MCD
El Pollo LoCo Holdings Inc Valuation – Initial Coverage $LOCO
Chipotle Mexican Grill Inc Valuation – March 2017 $CMG

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corporation Valuation – February 2018 $MCD

Company Profile (obtained from Marketwatch): McDonald’s Corp. engages in the franchise and management of restaurant chains. It operates through the following segments: U.S.; International Lead Markets; High Growth Markets; Foundational Markets & Corporate. The U.S. segment manages fast food restaurants and provides mobile application for promos and orders. The International Lead Markets segment operates in Australia, Canada, France, Germany, and the United Kingdom. The High Growth Markets segment expands its franchise and store operations in China, Italy, Korea, Poland, Russia, Spain, Switzerland, and the Netherlands. The Foundational Markets & Corporate segment refers to the firm’s administrative activities. The company was founded by Raymond Albert Kroc on April 15, 1955 and is headquartered in Oak Brook, IL.

MCD Chart

MCD data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MCD – February 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $129,989,098,133 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.28 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 35.32% Pass
6. Moderate PEmg Ratio PEmg < 20 26.70 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -38.14 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.28 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 27.05 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $6.11
MG Growth Estimate 2.73%
MG Value $85.30
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $88.57
MG Value based on 0% Growth $51.92
Market Implied Growth Rate 9.10%
Current Price $163.06
% of Intrinsic Value 191.15%

McDonald’s Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.17 in 2014 to an estimated $6.11 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.1% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into McDonald’s Corporation revealed the company was trading above its Graham Number of $0. The company pays a dividend of $3.83 per share, for a yield of 2.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 26.7, which was below the industry average of 33.24, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-38.41.

McDonald’s Corporation receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$38.41
Graham Number $0.00
PEmg 26.70
Current Ratio 1.28
PB Ratio -38.14
Current Dividend $3.83
Dividend Yield 2.35%
Number of Consecutive Years of Dividend Growth 20

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2017
Total Current Assets $4,790,300,000
Total Current Liabilities $3,740,200,000
Long-Term Debt $28,402,600,000
Total Assets $32,559,600,000
Intangible Assets $2,373,300,000
Total Liabilities $36,037,200,000
Shares Outstanding (Diluted Average) 813,500,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.08
Dec2017 $6.37
Dec2016 $5.44
Dec2015 $4.80
Dec2014 $4.82
Dec2013 $5.55
Dec2012 $5.36
Dec2011 $5.27
Dec2010 $4.58
Dec2009 $4.11
Dec2008 $3.76
Dec2007 $1.98
Dec2006 $2.83
Dec2005 $2.04
Dec2004 $1.79
Dec2003 $1.15
Dec2002 $0.70
Dec2001 $1.25
Dec2000 $1.46
Dec1999 $1.39
Dec1998 $1.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.11
Dec2017 $5.55
Dec2016 $5.15
Dec2015 $5.06
Dec2014 $5.17
Dec2013 $5.22
Dec2012 $4.91
Dec2011 $4.43
Dec2010 $3.83
Dec2009 $3.28
Dec2008 $2.74
Dec2007 $2.14
Dec2006 $2.05
Dec2005 $1.56
Dec2004 $1.31
Dec2003 $1.11
Dec2002 $1.12

Recommended Reading:

Other ModernGraham posts about the company

5 Overvalued Dow Components – December 2016
McDonald’s Corp Valuation – November 2016 $MCD
5 Overvalued Dow Components – July 2016
McDonald’s Corporation Valuation – May 2016 $MCD
McDonald’s Corporation – November 2015 Update $MCD

Other ModernGraham posts about related companies

El Pollo LoCo Holdings Inc Valuation – Initial Coverage $LOCO
Chipotle Mexican Grill Inc Valuation – March 2017 $CMG
Sonic Corporation Valuation – Initial Coverage $SONC
Darden Restaurants Inc Valuation – February 2017 $DRI
Jack in the Box Inc Valuation – Initial Coverage $JACK
Chuy’s Holdings Inc Valuation – Initial Coverage $CHUY
Yum Brands Inc Valuation – December 2016 $YUM
McDonald’s Corp Valuation – November 2016 $MCD
Chipotle Mexican Grill Inc Valuation – August 2016 $CMG
Yum! Brands Inc Valuation – August 2016 $YUM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corp Valuation – November 2016 $MCD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how McDonald’s Corp (MCD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McDonald’s Corporation (McDonald’s) operates and franchises McDonald’s restaurants. The Company’s restaurants serve a locally-relevant menu of quality food and drinks sold at various price points in over 100 countries. The Company’s segments include U.S., International Lead Markets, High Growth Markets and Foundational Markets and Corporate. Of the approximately 36,525 restaurants in over 120 countries, approximately 30,080 are franchised and over 6,444 are operated by the Company. McDonald’s franchised restaurants are owned and operated under various structures, including conventional franchise, developmental license or affiliate. The Company is primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and decor.

MCD Chart

MCD data by YCharts

Downloadable PDF version of this valuation:

moderngraham-valuation-of-mcd-november-2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $100,112,076,960 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.96 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 51.68% Pass
6. Moderate PEmg Ratio PEmg < 20 23.46 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -62.63 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.96 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -148.95 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

mcd-value-chart-november-2016

EPSmg $5.11
MG Growth Estimate 0.64%
MG Value $49.98
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $74.16
MG Value based on 0% Growth $43.47
Market Implied Growth Rate 7.48%
Current Price $120.00
% of Intrinsic Value 240.10%

McDonald’s Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.91 in 2012 to an estimated $5.11 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.48% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into McDonald’s Corporation revealed the company was trading above its Graham Number of $0. The company pays a dividend of $3.56 per share, for a yield of 3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 23.46, which was below the industry average of 30.22, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-35.16.

McDonald’s Corporation receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

mcd-charts-november-2016

Net Current Asset Value (NCAV) -$35.16
Graham Number $0.00
PEmg 23.46
Current Ratio 0.96
PB Ratio -62.63
Current Dividend $3.56
Dividend Yield 2.97%
Number of Consecutive Years of Dividend Growth 20


Useful Links:

 

 

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $4,302,100,000
Total Current Liabilities $4,476,700,000
Long-Term Debt $26,007,000,000
Total Assets $32,486,900,000
Intangible Assets $2,504,700,000
Total Liabilities $34,111,000,000
Shares Outstanding (Diluted Average) 847,700,000

Earnings Per Share History

Next Fiscal Year Estimate $5.32
Dec2015 $4.80
Dec2014 $4.82
Dec2013 $5.55
Dec2012 $5.36
Dec2011 $5.27
Dec2010 $4.58
Dec2009 $4.11
Dec2008 $3.76
Dec2007 $1.98
Dec2006 $2.83
Dec2005 $2.04
Dec2004 $1.79
Dec2003 $1.15
Dec2002 $0.70
Dec2001 $1.25
Dec2000 $1.46
Dec1999 $1.39
Dec1998 $1.10
Dec1997 $1.15
Dec1996 $1.08

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.11
Dec2015 $5.06
Dec2014 $5.17
Dec2013 $5.22
Dec2012 $4.91
Dec2011 $4.43
Dec2010 $3.83
Dec2009 $3.28
Dec2008 $2.74
Dec2007 $2.14
Dec2006 $2.05
Dec2005 $1.56
Dec2004 $1.31
Dec2003 $1.11
Dec2002 $1.12
Dec2001 $1.31
Dec2000 $1.30

Recommended Reading:

Other ModernGraham posts about the company

5 Overvalued Dow Components – July 2016
McDonald’s Corporation Valuation – May 2016 $MCD
McDonald’s Corporation – November 2015 Update $MCD
30 Companies in the Spotlight This Week – 11/15/14
McDonald’s Corporation Annual Valuation – 2014 $MCD

Other ModernGraham posts about related companies

Yum! Brands Inc Valuation – August 2016 $YUM
Starbucks Corp Valuation – June 2016 $SBUX
McDonald’s Corporation Valuation – May 2016 $MCD
Chipotle Mexican Grill Inc Stock Valuation – February 2016 $CMG
McDonald’s Corporation – November 2015 Update $MCD
Chipotle Mexican Group Inc Valuation – November 2015 Update $CMG
Darden Restaurants Inc. Analysis – September 2015 Update $DRI
Chipotle Mexican Grill Inc. Analysis – August 2015 Update $CMG
Chipolte Mexican Grill Inc. Quarterly Valuation – May 2015 $CMG
Yum! Brands Inc. Annual Valuation – 2015 $YUM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corporation Valuation – May 2016 $MCD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how McDonald’s Corporation (MCD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McDonald’s Corporation (McDonald’s) operates and franchises McDonald’s restaurants. The Company’s restaurants serve a locally-relevant menu of quality food and drinks sold at various price points in over 100 countries. The Company’s segments include U.S., International Lead Markets, High Growth Markets and Foundational Markets and Corporate. Of the approximately 36,525 restaurants in over 120 countries, approximately 30,080 are franchised and over 6,444 are operated by the Company. McDonald’s franchised restaurants are owned and operated under various structures, including conventional franchise, developmental license or affiliate. The Company is primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and decor.

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ModernGraham Valuation of MCD – May 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $113,943,760,419 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.77 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 52.18% Pass
6. Moderate PEmg Ratio PEmg < 20 25.10 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 29.84 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.77 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 10.65 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MCD value chart May 2016

EPSmg $5.13
MG Growth Estimate 0.69%
MG Value $50.66
Opinion Overvalued
MG Grade B
MG Value based on 3% Growth $74.40
MG Value based on 0% Growth $43.62
Market Implied Growth Rate 8.30%
Current Price $128.82
% of Intrinsic Value 254.26%

McDonald’s Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.91 in 2012 to an estimated $5.13 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

McDonald’s Corporation performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

MCD charts May 2016

Net Current Asset Value (NCAV) -$27.80
Graham Number $22.75
PEmg 25.10
Current Ratio 1.77
PB Ratio 29.84
Current Dividend $3.48
Dividend Yield 2.70%
Number of Consecutive Years of Dividend Growth 20

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $5,051,600,000
Total Current Liabilities $2,858,700,000
Long-term Debt $23,352,600,000
Total Assets $33,795,400,000
Intangible Assets $2,569,800,000
Total Liabilities $29,932,400,000
Shares Outstanding (Diluted Average) 894,900,000

Earnings Per Share History

Next Fiscal Year Estimate $5.37
12/1/2015 $4.80
12/1/2014 $4.82
12/1/2013 $5.55
12/1/2012 $5.36
12/1/2011 $5.27
12/1/2010 $4.58
12/1/2009 $4.11
12/1/2008 $3.76
12/1/2007 $1.98
12/1/2006 $2.83
12/1/2005 $2.04
12/1/2004 $1.79
12/1/2003 $1.15
12/1/2002 $0.70
12/1/2001 $1.25
12/1/2000 $1.46
12/1/1999 $1.39
12/1/1998 $1.10
12/1/1997 $1.15
12/1/1996 $1.11

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.13
12/1/2015 $5.06
12/1/2014 $5.17
12/1/2013 $5.22
12/1/2012 $4.91
12/1/2011 $4.43
12/1/2010 $3.83
12/1/2009 $3.28
12/1/2008 $2.74
12/1/2007 $2.14
12/1/2006 $2.05
12/1/2005 $1.56
12/1/2004 $1.31
12/1/2003 $1.11
12/1/2002 $1.12
12/1/2001 $1.31
12/1/2000 $1.30

Recommended Reading:

Other ModernGraham posts about the company

McDonald’s Corporation – November 2015 Update $MCD
McDonald’s Corporation – November 2015 Update $MCD
30 Companies in the Spotlight This Week – 11/15/14
McDonald’s Corporation Annual Valuation – 2014 $MCD
10 Companies in the Spotlight This Week – 11/15/13

Other ModernGraham posts about related companies

Chipotle Mexican Grill Inc Stock Valuation – February 2016 $CMG
McDonald’s Corporation – November 2015 Update $MCD
Chipotle Mexican Grill Inc Stock Valuation – February 2016 $CMG
McDonald’s Corporation – November 2015 Update $MCD
Chipotle Mexican Group Inc Valuation – November 2015 Update $CMG
Darden Restaurants Inc. Analysis – September 2015 Update $DRI
Chipotle Mexican Grill Inc. Analysis – August 2015 Update $CMG
Chipolte Mexican Grill Inc. Quarterly Valuation – May 2015 $CMG
Yum! Brands Inc. Annual Valuation – 2015 $YUM
Starbucks Corporation Annual Valuation – 2015 $SBUX

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corporation – November 2015 Update $MCD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how McDonald’s Corporation (MCD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McDonald’s Corporation operates and franchises McDonald’s restaurants. McDonald’s global system comprises both Company-owned and franchised restaurants. The Company manages its business as distinct geographic segments: the United States (U.S.); Europe, and Asia/Pacific, Middle East and Africa (APMEA). The Company’s operations in Canada and Latin America, as well as its Corporate activities are reported under Other Countries & Corporate. The Company’s restaurants offer a substantially uniform menu, including hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, French fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafe beverages and other beverages. McDonald’s franchised restaurants are owned and operated under one of the following structures: conventional franchise, developmental license or affiliate.

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To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MCD – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $103,732,429,987 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.52 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 75.03% Pass
6. Moderate PEmg Ratio PEmg < 20 22.57 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 12.71 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.52 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 11.71 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MCD value Chart November 2015

EPSmg $5.00
MG Growth Estimate 1.93%
MG Value $61.89
Opinion Overvalued
MG Value based on 3% Growth $72.57
MG Value based on 0% Growth $42.54
Market Implied Growth Rate 7.04%
Current Price $112.97
% of Intrinsic Value 182.54%

McDonald’s Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.43 in 2011 to an estimated $5.00 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 7.04% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on McDonald’s Corporation (MCD)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

MCD Charts November 2015

Net Current Asset Value (NCAV) -$21.56
Graham Number $30.31
PEmg 22.57
Current Ratio 1.52
PB Ratio 12.71
Dividend Yield 3.01%
Number of Consecutive Years of Dividend Growth 20

 

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $4,492,600,000
Total Current Liabilities $2,956,500,000
Long-Term Debt $17,990,500,000
Total Assets $32,959,500,000
Intangible Assets $2,581,600,000
Total Liabilities $24,649,700,000
Shares Outstanding (Diluted Average) 934,800,000

Earnings Per Share History

Next Fiscal Year Estimate $4.63
Dec14 $4.82
Dec13 $5.55
Dec12 $5.36
Dec11 $5.27
Dec10 $4.58
Dec09 $4.11
Dec08 $3.76
Dec07 $1.98
Dec06 $2.83
Dec05 $2.04
Dec04 $1.79
Dec03 $1.15
Dec02 $0.70
Dec01 $1.25
Dec00 $1.46
Dec99 $1.39
Dec98 $1.10
Dec97 $1.15
Dec96 $1.08
Dec95 $0.99

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.00
Dec14 $5.17
Dec13 $5.22
Dec12 $4.91
Dec11 $4.43
Dec10 $3.83
Dec09 $3.28
Dec08 $2.74
Dec07 $2.14
Dec06 $2.05
Dec05 $1.56
Dec04 $1.31
Dec03 $1.11
Dec02 $1.12
Dec01 $1.31
Dec00 $1.30
Dec99 $1.20

Recommended Reading:

Other ModernGraham posts about the company

30 Companies in the Spotlight This Week – 11/15/14
McDonald’s Corporation Annual Valuation – 2014 $MCD
10 Companies in the Spotlight This Week – 11/15/13
ModernGraham Valuation: McDonald’s Corporation (MCD)

Other ModernGraham posts about related companies

Chipotle Mexican Group Inc Valuation – November 2015 Update $CMG
Darden Restaurants Inc. Analysis – September 2015 Update $DRI
Chipotle Mexican Grill Inc. Analysis – August 2015 Update $CMG
Chipolte Mexican Grill Inc. Quarterly Valuation – May 2015 $CMG
Yum! Brands Inc. Annual Valuation – 2015 $YUM
Starbucks Corporation Annual Valuation – 2015 $SBUX
Chipotle Mexican Grill Inc. Quarterly Valuation – February 2015 $CMG
McDonald’s Corporation Annual Valuation – 2014 $MCD
Chipotle Mexican Grill Inc. Quarterly Valuation – October 2014 $CMG
Darden Restaurants Inc. Annual Valuation – 2014 $DRI

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

McDonald’s Corporation Annual Valuation – 2014 $MCD

181px-McDonald's_Golden_Arches.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor Near 52 Week Lows – November 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how McDonald’s Corporation (MCD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve menu at various price points providing value in 119 countries globally. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. In certain circumstances, the Company participates in reinvestment for conventional franchised restaurants. In February 2014, McDonald’s Corp announced the opening of its restaurant in Vietnam.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $95.14
MG Value $99.75
MG Opinion Fairly Valued
Value Based on 3% Growth $75.30
Value Based on 0% Growth $44.14
Market Implied Growth Rate 4.91%
Net Current Asset Value (NCAV) -$17.47
PEmg 18.32
Current Ratio 1.25
PB Ratio 6.87

Balance Sheet – September 2014

Current Assets $5,210,000,000
Current Liabilities $4,180,000,000
Total Debt $14,517,000,000
Total Assets $36,021,000,000
Intangible Assets $2,811,000,000
Total Liabilities $22,395,000,000
Outstanding Shares 983,800,000

Earnings Per Share

2014 (estimate) $4.90
2013 $5.55
2012 $5.36
2011 $5.27
2010 $4.58
2009 $4.11
2008 $3.76
2007 $1.98
2006 $2.83
2005 $2.04
2004 $1.79

Earnings Per Share – ModernGraham

2014 (estimate) $5.19
2013 $5.22
2012 $4.91
2011 $4.43
2010 $3.83
2009 $3.28

Dividend History

Conclusion:

McDonald’s Corp does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio along with the high PB ratio.  The Enterprising Investor is concerned by the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things,  the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.83 in 2010 to an estimated $5.19 for 2014.  This demonstrated lack of growth supports the market’s implied estimate of 4.91% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out previous ModernGraham valuations of McDonald’s Corp (MCD) for better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on McDonald’s Corp (MCD)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in McDonald’s Corp (MCD) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

ModernGraham Valuation: McDonald’s Corporation (MCD)

money

Company Profile (obtained from Google Finance): McDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve menu at various price points providing value in 119 countries globally. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time. As of December 31, 2012, 34,480 restaurants in 119 countries at year-end 2012, 27,882 were franchised or licensed (including 19,869 franchised to conventional franchisees, 4,350 licensed to developmental licensees and 3,663 licensed to foreign affiliates (primarily Japan) and 6,598 were operated by the Company.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value $142
MG Opinion Undervalued
Value Based on 3% Growth $76
Value Based on 0% Growth $44
Market Implied Growth Rate 5.06%
Net Current Asset Value (NCAV) -$15.73
PEmg 18.62
Current Ratio 1.24
PB Ratio 6.37

Key Data:

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $4,734,100,000
Current Liabilities $3,822,300,000
Total Debt $13,487,800,000
Total Assets $35,551,300,000
Intangible Assets $2,853,800,000
Total Liabilities $20,386,400,000
Outstanding Shares 995,000,000

Earnings Per Share – Diluted

2013 (estimate) $5.53
2012 $5.36
2011 $5.27
2010 $4.58
2009 $4.11
2008 $3.76
2007 $1.93
2006 $2.30
2005 $2.04
2004 $1.79
2003 $1.18
2002 $0.77

Earnings Per Share – Modern Graham

2013 (estimate) $5.21
2012 $4.91
2011 $4.43
2010 $3.79
2009 $3.20
2008 $2.62

Conclusion:

McDonald’s looks good when you consider the company only from a valuation perspective, after achieving earnings growth from an EPSmg (normalized earnings) of $2.62 in 2008 to an estimated $5.21 in 2013.  However, the company’s financials are not strong enough for either the Defensive or Enterprising Investor because the company holds too much debt at this time.  If McDonald’s could reduce the amount of debt on its books and improve its current ratio from a meager 1.24 to 1.5, then it would become much more attractive.  As it stands, Intelligent Investors can only speculate as to the intrinsic value of the company and should do considerable further research before making any investment into McDonald’s.

What do you think?  Is McDonald’s undervalued or does Mr. Market have it right?  Should the company only be considered speculative?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in McDonald’s at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

Chipotle Mexican Grill Inc Valuation – March 2019 #CMG

Company Profile (excerpt from Reuters): Chipotle Mexican Grill, Inc. (Chipotle), incorporated on January 30, 1998, together with its subsidiaries, operates Chipotle Mexican Grill restaurants. The Company’s Chipotle Mexican Grill restaurants serve a menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. As of December 31, 2016, the Company managed its operations and restaurants based on 11 regions. As of December 31, 2016, the Company operated 2,198 Chipotle restaurants throughout the United States, as well as 29 international Chipotle restaurants, and it also had 23 restaurants in operation in other non-Chipotle concepts. As of December 31, 2016, 29 of its restaurants were located outside of the United States, with 17 in Canada, six in the United Kingdom, five in France and one in Frankfurt, Germany. The Company sells gift cards, which do not have an expiration date.

CMG Chart

CMG data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CMG – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $18,600,677,500 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.81 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 11.30% Fail
6. Moderate PEmg Ratio PEmg < 20 87.26 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 13.05 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.81 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $7.71
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $111.83
MG Value based on 0% Growth $65.56
Market Implied Growth Rate 39.38%
Current Price $672.98
% of Intrinsic Value N/A

Chipotle Mexican Grill, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $12.51 in 2015 to an estimated $7.71 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 39.38% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Chipotle Mexican Grill, Inc. revealed the company was trading above its Graham Number of $113.79. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 87.26, which was above the industry average of 33.53. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.34.

Chipotle Mexican Grill, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$0.34
Graham Number $113.79
PEmg 87.26
Current Ratio 1.81
PB Ratio 13.05
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $814,794,000
Total Current Liabilities $449,990,000
Long-Term Debt $0
Total Assets $2,265,518,000
Intangible Assets $21,939,000
Total Liabilities $824,179,000
Shares Outstanding (Diluted Average) 27,947,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $11.06
Dec2018 $6.31
Dec2017 $6.17
Dec2016 $0.77
Dec2015 $15.10
Dec2014 $14.13
Dec2013 $10.47
Dec2012 $8.75
Dec2011 $6.76
Dec2010 $5.64
Dec2009 $3.95
Dec2008 $2.36
Dec2007 $2.13
Dec2006 $1.28
Dec2005 $1.43
Dec2004 $0.24
Dec2003 -$0.34
Dec2002 -$0.87
Dec2001 -$1.49

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $7.71
Dec2018 $6.86
Dec2017 $7.86
Dec2016 $9.09
Dec2015 $12.51
Dec2014 $10.53
Dec2013 $8.19
Dec2012 $6.53
Dec2011 $5.00
Dec2010 $3.77
Dec2009 $2.64
Dec2008 $1.82
Dec2007 $1.35
Dec2006 $0.75
Dec2005 $0.26
Dec2004 -$0.38
Dec2003 -$0.64

Recommended Reading:

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Chipotle Mexican Grill Inc Valuation – June 2018 $CMG
Chipotle Mexican Grill Inc Valuation – March 2017 $CMG
Chipotle Mexican Grill Inc Valuation – August 2016 $CMG
Chipotle Mexican Grill Inc Stock Valuation – February 2016 $CMG
Chipotle Mexican Group Inc Valuation – November 2015 Update $CMG

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Darden Restaurants Inc Valuation – March 2019 #DRI
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Jack in the Box Inc Valuation – July 2018 $JACK
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Chipotle Mexican Grill Inc Valuation – June 2018 $CMG
Darden Restaurants Inc Valuation – May 2018 $DRI
Yum Brands Inc Valuation – April 2018 $YUM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Darden Restaurants Inc Valuation – March 2019 #DRI

Company Profile (excerpt from Reuters): Darden Restaurants, Inc., incorporated on March 30, 1995, is a full-service restaurant company. The Company owned and operated 1,536 restaurants through its subsidiaries in the United States and Canada, as of May 29, 2016. The Company’s segments include Olive Garden, LongHorn Steakhouse, Fine Dining (which includes The Capital Grille, and Eddie V’s Prime Seafood and Wildfish Seafood Grille (Eddie V’s)) and Other Business (which includes Yard House, Seasons 52, Bahama Breeze, consumer-packaged goods and franchise revenues). As of May 29, 2016, the Company also had 50 restaurants operated by independent third parties pursuant to area development and franchise agreements.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of DRI – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $13,739,140,896 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.41 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 44.08% Pass
6. Moderate PEmg Ratio PEmg < 20 23.99 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 6.22 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.41 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -1.12 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $4.64
MG Growth Estimate 3.67%
MG Value $73.44
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $67.22
MG Value based on 0% Growth $39.41
Market Implied Growth Rate 7.75%
Current Price $111.24
% of Intrinsic Value 151.48%

Darden Restaurants, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.72 in 2015 to an estimated $4.64 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.75% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Darden Restaurants, Inc. revealed the company was trading above its Graham Number of $47.27. The company pays a dividend of $2.52 per share, for a yield of 2.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 23.99, which was below the industry average of 33.53, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-21.76.

Darden Restaurants, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$21.76
Graham Number $47.27
PEmg 23.99
Current Ratio 0.41
PB Ratio 6.22
Current Dividend $2.52
Dividend Yield 2.27%
Number of Consecutive Years of Dividend Growth 2

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2018
Total Current Assets $561,200,000
Total Current Liabilities $1,385,300,000
Long-Term Debt $927,100,000
Total Assets $5,549,200,000
Intangible Assets $2,134,500,000
Total Liabilities $3,298,900,000
Shares Outstanding (Diluted Average) 125,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.59
May2018 $4.73
May2017 $3.80
May2016 $2.90
May2015 $5.47
May2014 $2.15
May2013 $3.13
May2012 $3.57
May2011 $3.39
May2010 $2.84
May2009 $2.65
May2008 $2.60
May2007 $1.35
May2006 $2.16
May2005 $1.78
May2004 $1.34
May2003 $1.27
May2002 $1.30
May2001 $1.06
May2000 $0.89
May1999 $0.66

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.64
May2018 $4.04
May2017 $3.63
May2016 $3.51
May2015 $3.72
May2014 $2.91
May2013 $3.23
May2012 $3.19
May2011 $2.85
May2010 $2.50
May2009 $2.25
May2008 $1.99
May2007 $1.65
May2006 $1.72
May2005 $1.45
May2004 $1.25
May2003 $1.15

Recommended Reading:

Other ModernGraham posts about the company

Darden Restaurants Inc Valuation – May 2018 $DRI
Darden Restaurants Inc Valuation – February 2017 $DRI
Darden Restaurants Inc. Analysis – September 2015 Update $DRI
5 Speculative and Overvalued Companies to Avoid – October 2014
17 Companies in the Spotlight This Week – 9/27/2014

Other ModernGraham posts about related companies

Yum Brands Inc Valuation – February 2019 $YUM
Starbucks Corporation Valuation – January 2019 $SBUX
McDonald’s Corp Valuation – November 2018 $MCD
Sonic Corp Valuation – August 2018 $SONC
Jack in the Box Inc Valuation – July 2018 $JACK
Chuy’s Holdings Inc Valuation – July 2018 $CHUY
Chipotle Mexican Grill Inc Valuation – June 2018 $CMG
Darden Restaurants Inc Valuation – May 2018 $DRI
Yum Brands Inc Valuation – April 2018 $YUM
Starbucks Corporation Valuation – March 2018 $SBUX

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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