McDonald’s (MCD) Fundamental Analysis: is the McMeal going to hash it?

This week we look at McDonald’s Corporation (NYSE:MCD). With a market cap of over USD $93 billion and some 33,510 fast food outlets in 119 countries. The company has recently announced that it will open two vegetarian outlets in India and that it will  be providing calorie information on its menu items. In New York City it already does so, as required by the law. McDonald’s menu makeover includes a new Egg White Delight and various fruit offerings. The company has also made statements regarding its commitment to sustainability and environmental responsibility. CapitalCube evaluates just how the market views McDonald’s Corp. based on the numbers.

McDonalds (MCD)

Our analysis of the world’s largest fast food chain is peer-based and includes the ubiquitous Starbucks which boasts over 19,000 stores and Wendy’s. The full list of peers used in this analysis: Starbucks Corporation (NASDAQ:SBUX), Yum! Brands, Inc. (NYSE:YUM), Chipotle Mexican Grill, Inc. (NYSE:CMG), Tim Hortons Inc. (NYSE:THI), Darden Restaurants, Inc. (NYSE:DRI), Whitbread plc (LON:WTB), Panera Bread Co. (NASDAQ:PNRA), Brinker International, Inc. (NYSE:EAT), The Wendy’s Company (NASDAQ:WEN), Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL).

We have previously analyzed Starbucks Corp. and Chipotle Mexican Grill Inc.

CapitalCube Fundamental Analysis Score & Dividend Score_McDonald's Corp MCD

Fundamental Analysis

Relative Valuation

McDonald’s Corp.’s current Price/Book of 6.6 is about median in its peer group.

Valuation Drivers

MCD-US’s operating performance is relatively good compared to its peers. The market currently does not expect high earnings growth relative to its peers but seems to expect the company to maintain its relatively high rates of return.

Operations Diagnostic

Margin Driven
MCD-US’s relatively high profit margins are burdened by relative asset inefficiency.

Earnings Leverage

Changes in the company’s annual revenue and earnings are around the median among its peers.

Sustainability of Returns

Over the last five years, MCD-US’s return on assets has declined from above median to about median among its peers, indicating declining relative operating performance.

Drivers of Margin

The company’s relatively high pre-tax margin suggests tight control on operating costs versus peers.

Growth Expectations

MCD-US’s revenue growth in recent years and current PE ratio are both around their respective peer medians suggesting that historical performance and long-term growth expectations for the company are largely in sync.

Capital Investment Strategy

The company’s capital investment seems appropriate for a business with peer median returns.

Leverage & Liquidity

Quick and Able
MCD-US has the financial and operating capacity to borrow quickly.

Share Price Performance

Relative underperformance over the last year has improved more recently.

MCD-US’s share price performance of 5.7% over the last 12 months is below its peer median. However, its 30-day trend of 4.1% is now around the peer median suggesting that the company’s recent performance has improved relative to peers.
Stock price performance over the last month vs. last year charted with respect to peers for McDonald's Corp. (MCD)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)

Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?
The market seems to expect MCD-US to maintain its relatively high returns.
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Operations Diagnostic

MCD-US’s relatively high profit margins are burdened by relative asset inefficiency.

The company’s relatively high profit margins (currently 20.0% vs. peer median of 10.4%) are burdened by asset inefficiency with asset turns of 0.8x compared to the peer median of 1.5x. Overall, this suggests a margin driven operating model relative to its peers.
Asset Efficency or Sales/Total Assets vs. Net Margin% or NI/Sales with respect to peers for McDonald's Corp. (MCD)

MCD-US has maintained its Margin Driven profile from the recent year-end.

MCD-US’s net margin continues to trend downward but is still within one standard deviation above its five-year average net margin of 17.9%. Though its net margin has remained relatively stable at 20.0% compared to 2011, its peer median has increased to 10.4% from 9.5% during this period. Net margin fell 1.3 percentage points relative to peers.
MCD-US’s asset turnover is similar to last year’s high of 0.8, which compares to a low of 0.8 in 2010. Compared to 2011, asset turnover has remained relatively stable for both the company (0.8) and the peer median (1.5). Overall, asset turnover and net margin trends suggest that MCD-US’s ROA at 16.6% is similar to last year’s high of 16.9%, which compares to a low of 8.0% in 2007.
Graph of Net Margin% showing Peer Median (TTM) for McDonald's Corp. (MCD)
Graph of Sales/Total Assets showing Peer Median (TTM) for McDonald's Corp. (MCD)

Earnings Leverage

Changes in revenue and earnings are around the median among its peers.
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Sustainability of Returns

Relative to peers, recent returns have declined versus last five years.

MCD-US’s current return on assets is around peer median (16.6% vs. peer median 14.6%). This contrasts with its higher than peer median return on assets over the past five years (14.3% vs. peer median 11.4%), suggesting that the company’s relative operating performance has declined.
Sustainability of Returns or 5 year average ROA% vs. Latest ROA% charted with respect to peers for McDonald's Corp. (MCD)

Drivers of Margin

Relatively high pre-tax margin suggests tight control on operating costs versus peers.

The company’s gross margin of 44.8% is around peer median suggesting that MCD-US’s operations do not benefit from any differentiating pricing advantage. However, MCD-US’s pre-tax margin is more than the peer median (29.2% compared to 14.5%) suggesting relatively tight control on operating costs.
Drivers of Margin or Gross Margin% vs. Pre Tax Margin % charted with respect to Peers for McDonald's Corp. (MCD)

MCD-US has maintained its relatively high pre-tax margin profile from the recent year-end.

MCD-US’s gross margin is greater than (but within one standard deviation of) its five-year average gross margin of 43.2%. Though its gross margin has remained relatively stable at 44.8% compared to 2011, its peer median has decreased to 37.4% from 43.5% during this period. Gross margin rose 6.2 percentage points relative to peers.
MCD-US’s pre-tax margin is its highest relative to the last five years and compares to a low of 15.2% in 2007. Though its pre-tax margin has remained relatively stable at 29.2% compared to 2011, its peer median has increased to 14.5% from 12.8% during this period. Relative to peers, pre-tax margin fell 1.6 percentage points.
Chart of Gross Margin %  showing Peer Median (TTM) for McDonald's Corp. (MCD)
Chart of Pre Tax Margin % showing Peer Median (TTM) for McDonald's Corp. (MCD)

Growth Expectations

Historical performance and long-term growth expectations for the company are largely in sync.
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Capital Investment Strategy

MCD-US’s capital investment seems appropriate in a business with peer median returns.
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Leverage & Liquidity

MCD-US has the financial and operating capacity to borrow quickly.

MCD-US has maintained its Quick & Able profile from the recent year-end.
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Detailed tables on Key Valuation Items, Revenues & Margins, Key Assets (% of Revenues), Key Working Capital Items, Cash Management Indicators, Key Liquidity Items, Key Cash Flow Items (% of Revenues) are available on logging in.

Company Profile

McDonald’s Corp. operates and franchises McDonald’s restaurants in the global restaurant industry. The company manages its business as distinct geographic segments. Its significant reportable geographic segments include the United States, Europe, and Asia-Pacific, Middle East and Africa. The company operates in the global restaurant industry and manages its business as distinct geographic segments. It offers a substantially uniform menu, although there are geographic variations to suit local consumer preferences and tastes. McDonald’s menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, Snack Wraps, French fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafé beverages and other beverages. It was founded on April 15, 1955 by Raymond Albert Kroc and is headquartered in Oak Brook, IL.

Disclaimer

The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party’s use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you’re agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website www.analytixinsight.com.

This article was written by abha.dawesar, and posted on Capital Cube.

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