Restaurants Stocks

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


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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

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McDonald’s Corporation Valuation – May 2016 $MCD
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McDonald’s Corporation – November 2015 Update $MCD
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Chipotle Mexican Grill Inc. Analysis – August 2015 Update $CMG
Chipolte Mexican Grill Inc. Quarterly Valuation – May 2015 $CMG
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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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