I believe $MCD at approximately $74/share is fairly valued right now with little or no margin of safety.
McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of June 2010, there were 32,500 locations in 117 countries, including 26,200 operated by franchisees/affiliates and 6,300 company units.
Source: Morningstar.com
I estimated the firm's WACC at 7.37% using the Capital Asset Pricing Model and information from the company's recent SEC filings. ValuePro has an online baseline WACC calculator at http://www.valuepro.net/index.shtml. It calculates $MCD's WACC at 6.77%. Assuming I missed the mark on my estimate, factor in no margin of safety and go with lower figure: 6.77%.
Recent free cash flows and noted growth rates
Year | FCF $Millions |
2000 | 381 |
2001 | 451 |
2002 | 338 |
2003 | 1586 |
2004 | 2335 |
2005 | 2730 |
2006 | 2600 |
2007 | 2930 |
2008 | 3782 |
2009 | 3799 |
TTM | 4041 |
Average Annual Growth: approx 52%
CAGR: approx 29%
Internal Growth Rate: approx 8%
Sustainable Growth Rate: approx 20%
Consensus Forecast Industry 5-Year Growth: approx 15% per year
Consensus Forecast Company 5-Year Growth: approx 10% per year
Factor in no margin of safety and go with the forecast 5-year growth rate of 10% per year and assume that after the next five years, the company achieves no growth or 0% growth per year forever.
Discounted Cash Flow Valuation
Year | FCF $ Millions |
0 | 4041 |
1 | 4445 |
2 | 4890 |
3 | 5379 |
4 | 5916 |
5 | 6508 |
Terminal Value | 105744 |
The firm's future cash flows discounted at a WACC of 6.77% give a present value for the entire firm (Debt + Equity) of $98,324 million. If the firm's fair value of all debt is estimated at $13,000 million, then the fair value of the firm's equity could be valued at $85,324 million.
$85,324 million / 1,060 million outstanding shares = $80.49 per share. A 20% margin of safety from here is approx $64 per share and $MCD's current share price is approx $74. I consider $MCD fairly valued today on a cash flow basis with little or no margin of safety.
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