Thursday, March 24, 2011

McDonald's Corporation: $MCD cash flow valuation update

Current Price: ~ $75/share
Projected Yield: ~ 3.27%


I believe McDonald's Corporation ($MCD) is fairly valued at $82/share on a cash flow valuation basis.    


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 December 2010, there were 32,700 locations in 117 countries, including 26,300 operated by franchisees/affiliates and 6,400 company units.

I estimated the firm's WACC today at 7.16% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2001
451
2002
338
2003
1586
2004
2335
2005
2730
2006
2600
2007
2930
2008
3782
2009
3799
2010
4206

Average Annual Growth FCF: approx. 51%
CAGR FCF: approx. 28%
Consensus Forecast Industry 5-Year Growth: approx. 15% per year
Consensus Forecast Company 5-Year Growth: approx. 10% per year

Assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
4206
1
4627
2
5089
3
5598
4
6158
5
6774
Terminal Value
104068


The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $96,410 million. If the firm's fair value of debt is estimated at $11,505 million, then the fair value of the firm's equity could be $84,905 million.  $84,905 million / 1040 million outstanding shares is approximately $82 per share and a 20% margin of safety is $66/share.

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

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