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

Morningstar.com

Yahoo! Finance

McDonald's Corporation

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

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

Morningstar.com

Yahoo! Finance

About McDonald's.com

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

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.