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
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
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.
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,
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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