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.
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 $66/share.
Sources
Projected Yield: ~ 3.27%
I believe McDonald's Corporation ($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 yearConsensus 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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