Monday, February 27, 2012

McDonald's Corporation: $MCD Cash Flow Valuation Update


Current Price: ~ $100/share
Projected Yield: ~ 2.79%



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 September, there were 33,100 locations in 117 countries, including 26,800 franchisees/affiliates units and 6,400 company units.           


Estimated WACC for the firm today is 5.28% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
338
2003
1586
2004
2335
2005
2730
2006
2600
2007
2930
2008
3782
2009
3799
2010
4206
2011
4420


Average Annual Growth FCF ex-2002: ~ 15%
CAGR FCF ex-2002: ~ 14%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 10%
Sustainable Growth Rate: ~ 25%

Scenario 1
Average FCF (2011, 2010, 2009) is $4142 million
  • Start at $4142 million FCF
  • Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
4142
1
4556
2
5012
3
5513
4
6064
5
6671
Terminal Value
138882



The firm's future cash flows, discounted at a WACC of 5.28%, give a present value for the entire firm (Debt + Equity) of $131026 million. If the firm's fair value of debt is estimated at $12500 million, then the fair value of the firm's equity could be $118526 million.  $118526 million / 1020 million outstanding shares is approximately $116 per share and a 20% margin of safety is $93/share.


Scenario 2
All else being equal,
  • Discount the firm's future FCFs at 7.50%
  • Assume a 5-year growth rate in FCF of 10% per year, then 2% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
4142
1
4556
2
5012
3
5513
4
6064
5
6671
Terminal Value
133415


  • Present Value of the entire firm (Debt + Equity): $115132 million
  • Value of Equity: $102632 million or $101/share
  • 20% margin of safety is $81/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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