McDonald's - Cash flow valuation

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.