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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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.


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
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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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)

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Chipotle Mexican Grill Inc. Quarterly Valuation – February 2015 $CMG
McDonald’s Corporation Annual Valuation – 2014 $MCD
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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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