TO: RCMP Spring 2009 Class
FROM: Shivam Khanna and Brandon McArthur
DATE: March 3, 2009
RE: McDonald’s (MCD) Recommendation
RECOMMENDATION: BUY 200 SHARES AT MARKET PRICE
Company Overview
McDonald’s Corporation, together with its subsidiaries, franchises and affiliates operates McDonald’s restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. As of December 31, 2008, the company operated 31,967 restaurants in 118 countries, of which 25,465 were operated by franchisees; and 6,502 were operated by the company. McDonald’s Corporation was founded in 1948 and is based in Oak Brook, Illinois. In 2008, the company had revenues of approximately $23billion and a market capitalization of approximately $58billion.
Important Factors
McDonald’s Corporation has recently been increasing the amount of stores they franchise versus own, which reduces top line revenues but increases margins as a comparison to sales, and results in more stable cash flows. This also makes it a less capital intensive and allows McDonald’s to use it cash for dividends and share-repurchase programs. Recently the company increased its dividend rate by 33%, taking it to annual level of $2. We expect this dividend to be maintained despite the current economic situation, given McDonald’s strong cash position. McDonald’s is poised for growth in China and other increasing growth in other developing countries. As a market leader in the food industry they have strong advertising and brand recognition. McDonald’s has seen a recent decline following along with the rest of the economy, but given it does not need to tap credit markets anytime soon, due to its unused $1.3billion credit line. We believe McDonald’s is fairly undervalued and in a good position to grow.
Recommendation
We valued MCD at $57.47 a share with a current market price of $52.43. In order to arrive at this value, we have used fairly conservative growth estimates and think McDonalds’ is in a strong position to grow. Thus, we recommend buying 200 shares of MCD at market price.