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


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.

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