Investment Thesis

Company Description McDonald’s is the largest quick-service restaurant chain in the world. It operates in over 100 countries and franchises over 93% of its restaurants. The company’s three geographic segments include the U.S., International Operated Markets, and International Developmental Licensed Markets & Corporate.

Krause Fund Research

12 Month Performance

Spring 2020

McDonald’s Corporation Stock Rating: BUY April 17, 2020 BUY Analysts

Aaron Nibaur Jacob Hines Deb Destahun Kanishk Puranik

aaron-nibaur@uiowa.edu jacob-hines@uiowa.edu deborah-destahun@uiowa.edu kanishk-puranik@uiowa.edu

The Krause Fund is bullish on McDonald’s for three main reasons. First, their unique, stable cash flow structure, shielding the blow of COVID-19 more than its peers. Second, their industry leading technology development, which led to massive check growth in 2019, and will pay further dividends as COVID-19 increases the importance of the drive-thru. Finally, we believe McDonald’s has some rare opportunities to steal market share and build on their strong same store sales growth. For these reasons, we issue a BUY rating and forecast 15% upside for MCD.

Drivers of Thesis

• Real Estate Ownership – Rental Income • Technology acquisitions – drove a spike in check growth, expected

to reduce wait times and increase customer satisfaction, perfect timing as 100% of transactions are going through the drive-thru

• Full-service restaurants shut down – attracts new customers to them, breakfast experiencing massive growth – industry leader in breakfast expertise – positioned to capitalize post-pandemic

Risks to Thesis

• Escalating disputes with franchisees • Huge declines not only in guest count, but also a much more

conservative spending consumer • Consumers adapting habits of more grocery shopping/cooking at

home, less eating out

Relative Financial Performance

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Coronavirus Disease 2019 (COVID-19) At the end of December 2019, a virus outbreak was first identified in Wuhan, China. The Coronavirus was seen to be highly infectious. By the end of January 2020, China went into lockdown, other countries reported their first cases and the World Health Organization (W.H.O) declared a global health emergency1. China shutting down its economy had negative implications on its trading partners’ economies including the United States, Japan, South Korea and Europe. Additionally, large corporations with a strong China presence and global supply chains were disrupted by the virus. By the end of February, China was no longer the only focal point of the virus, and the global economy was feeling the crippling effect of COVID-19.2 We believe the Coronavirus is a black swam event placing the United States’ economy into a recession that could last till 2022. On February 12, 2020, The U.S Stock Market was at an all-time high with S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite hitting record highs but by mid-March, the global stock market meltdown and volatility. The Federal Reserve began taking action on March 3rd with an emergency cut of 5 basis points (bps) to interest rates. However, by March 11th, the Federal Reserve cut rates again making interest rates near zero, the same day the W.H.O declared COVID-19 a pandemic. The CBOE Volatility Index (VIX), which measures stock-market volatility, reached a high of $85.47 on March 18 exceeding the previous record of $80.74 in November 2008 and demonstrating a flight-to-safety securities away from the stock market.3

Source: Yahoo Finance

By the end of March, the United States was leading in coronavirus cases, and 30 states had declared statewide orders to stay at home. Businesses considered nonessential have closed indefinitely or turned to working from home. The retail industry and small businesses have lost significant revenue with people staying home; many having to layoff or furlough employees. 22 million people have filed unemployment since the spread of COVID-19 as of April 16, 2020. In response to the virus, The United States Congress has passed 3 Coronavirus stimulus packages since March 3rd; phase 3 is a $2.1 trillion Emergency Aid Bill mostly comprised of loans to businesses and direct relief to U.S individuals.4 With now at least 42 states and several countries advising or enforcing people to stay home, corporations impacted have announced dividend suspension and paused stock repurchases.5 We expect these corporations to not have any stock repurchases in 2020 and buybacks in 2021 to be 50% compared to historical amounts. However, we do not foresee that COVID-19 will be the end of stock repurchases. We expect stock purchases to return to historical amounts after 3 years after the high potential of a second wave of the virus in winter 2020-2021. Public health officials believe COVID-19 social distancing will last well into 2021. With the potential of the second wave, we believe consumers and employees will be less willing to go to stores even when they return to normal business hours. COVID-19 will hurt sales, customer loyalty and vendor relationships. Overall, we expect COVID-19 to have long-term effects on cities including increased urban planning and physical distancing which could mean fewer retail stores and public gatherings. GDP Real gross domestic product is an inflation-adjusted measure of the goods and services produced in a certain geography over a specific period of time and represents the overall health of an economy. A strong economy indicates that firms have the financial capability to improve operations and grow their business. GDP is highly correlated with the performance of the consumer discretionary sector because consumer spending constitutes over two-thirds of GDP.16

Economic Outlook

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The Great Lockdown will eclipse the Great Recession as the worst economic downturn since the Great Depression. The International Monetary Fund expects global GDP to contract by 3% in 2020, drastically opposing their initial forecast in January of 3.3% growth. The coronavirus pandemic has forced governments worldwide to restrict human movement and close businesses, crippling the ability for firms to produce and consumers to spend. Because the discretionary sector relies on consumer spending to drive revenues, the current downturn will hinder the sector’s performance for the foreseeable future. Consumer Confidence 70% of the American economy is reliant upon consumer spending. The best up to date measure of this spending is consumer sentiment. The University of Michigan’s Index factors in consumer’s mood regarding their current financial status, including their expectations for the future as well. The latest release on April 10th has consumer sentiment stooping to a nine-year low, from 89.1 in March to 71 in April. This was also the largest one-month decrease ever. However, there are a couple specific factors the index surveys that actually suggest this current sentiment isn’t as bad as suggested. While the measure of current conditions did fall steeply by 31 points, future conditions only dropped by 10 points, indicating the consumer believes things will recover sooner than later. Another important factor to consider is, similar to the markets, sentiment is coming off record highs. This plunge is severe, but sentiment still remains manageable; and as hope starts to emerge and the economy re-opens, it seems the decline will begin to level off. We expect sentiment to experience a slight drop in May as consumers continue to process the implications of COVID-19, yet remain above levels experienced in the 2008 recession. In the summer months, we expect fairly quick bounce off the lows and believe sentiment will hover between 70 and 80 come Q3 and Q4. Expect it to linger there for a fairly long time as the consumer remains cautious of a second outbreak and recovers from ramifications from the virus.

Source: University of Michigan via FRED Unemployment Unemployment levels quickly went from some of the best ever to some of the worst ever due to COVID-19. The BLS measured unemployment at 4.4% in mid-March, marking a 0.9% uptick, the largest ever one-month increase besides war times. This has yet to take into account the last month of layoffs, which is sure to be a dramatic spike as well. Furthermore, the real rate of unemployment is actually much higher than the suggested rate currently. Millions of laid off workers or those who had their hours reduced won’t be deemed unemployed by the traditional unemployment measure conducted by the BLS due to them not actively looking for work. We estimate the real estimate as of mid-March to be around 6.5% vs BLS’s 4.4%. After factoring in the last month of layoffs, including the 22 million unemployment claims filed in the last 4 weeks, we estimate the unemployment rate to be around 20%. This is a staggering level, but we also believe that number will recover fairly quickly. A great portion of this spike is due to temporary layoffs or cuts in hours. For the mid-March measure, only 1% of the uptick were permanently layoffs. 9% of that uptick was temporary layoffs and 13% had hours reduced. We believe it will bounce back to around 10% by the end of Q3 and dip just below 10% by the end of Q4 as companies bring back furloughed workers but remain cautious in hiring as they recover from the financial implications of COVID-19.

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CPI/Inflation The Consumer Price Index (CPI) is a tool for measuring the average price of a basket of consumer goods and services. This index is often a good indicator of periods of inflation or deflation. When evaluating the consumer discretionary industry, it is important to understand how the purchasing power of a consumer changes over time.6 Over the past four months, the inflation rate has hovered between 2.0% and 2.5%. During the month of March, inflation fell 0.8% to 1.5%. Additionally, the CPI saw its greatest decline since January 2015, dropping 0.4%.7 While a decrease in the cost of consumer goods may be seen as a reason for consumers to buy more, it is important to note that this change is largely driven by the effects of COVID-19. As measures are taken to prevent the spread of this virus, we believe consumers will continue to spend less causing inflation to fall below 1.0% in the short-term and drive the CPI another 0.2% lower through the end of August 2020. This decrease in consumer spending in the near future will have an adverse effect on many players in the consumer discretionary industry.

Industry Description When looking at the restaurant industry, it can be broken down into two segments: casual dining and

quick service. The casual dining sector consists of restaurants more commonly known as “sit-down” restaurants. These restaurants vary widely in style and price point. The major players of this sector also vary by geographic location. McDonald’s however, falls under the fast-food denomination within the quick service sector. Companies within this sector offer food that can be prepared at short notice for a low price. Examples of companies in the fast-food domain include: Burger King, Taco Bell, Wendy’s, and KFC. The important distinction between fast-food and its counterpart, fast-casual, is the required preparation time (often attributed to the quality of the food) and the price at which it is sold.8 Popular restaurants that fall under the fast-casual label include: Shake Shack, Panera, Nando’s, and Culver’s. While there are certain distinctions between these subsectors, they are all competing for a similar customer base. The restaurant industry as a whole had sales of $129 billion in 2019, but that number is expected to fall to $115 billion in 2020 due to COVID-19.9

Full-Service vs Fast-Food While the restaurant industry is expected to suffer greatly from the effects of COVID-19, some restaurants will be feeling the pain more than others. Full-service restaurants in particular will be hit the hardest. A survey from the National Restaurant Association (NRA) discovered that an estimated 110,000 restaurants will permanently close over the next 30 days. This survey also found that the restaurant industry had lost an estimated $25 billion in sales during the first 22 days of March. For the week ending March 22, total transactions in the restaurant industry were down 36%.10 Even worse, full-service restaurant orders were down 71% during this same period. If there is a bright spot to all this, it is that McDonald’s is far more equipped to handle this change in consumption behavior than many of its counterparts in the restaurant industry. Full-service restaurants are now limited to takeout and curb-side pickup orders. McDonald’s on the other hand, has the capacity to serve an increase in drive thru orders. Prior to the coronavirus outbreak, 65% of sales in the United States for McDonald’s came via the drive thru. Knowing this, McDonald’s has taken steps to improve the drive thru experience in recent years. For example, expanding to double-lane drive thrus, increasing display brightness, improving

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Industry Analysis

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speaker quality, and more. With the lockdown measures in place now, quick service restaurants are relying on drive thru sales for 80%-90% of total revenue. Dietary Changes Over the last 15 years, the number of Americans following a plant-based diet has grown from 290,000 to 9.7 million.11 This presents a unique challenge for restaurants in the quick service industry who want to appeal to an evolving customer base. The non-meat industry is projected to be worth as much as $34 billion by 2030. The challenge here is that the fast-food industry runs on thin margins and non-meat alternatives are far more expensive to produce than their traditional beef counterparts. For example, the average beef burger can be sold at a 279.7% markup whereas a vegan burger sourced from Impossible Foods can only be marked up 175.3% on average.12 The key for McDonald’s will be to find the sweet spot where they have expanded their product offerings to meet a changing demand while also remaining profitable on those same items. At this point, McDonald’s has experimented with a plant-based burger known as the “P.L.T.” in isolated locations but has yet to announce when or if they will be offering that product across all locations in the future. They have struggled to find a vegan patty supplier with the capacity to meet the demand if the product were to be offered franchise wide. 13

Third-Party Delivery Another trend the restaurant industry has been forced to adapt to is the increasing demand for delivery options. Over the last five years, companies like Uber Eats, DoorDash, and GrubHub have seen a significant uptick in demand for their services. Many consumers are willing to pay extra fees for the convenience of having their food brought to them. This has provided a dilemma for quick service restaurants similar to the way plant-based alternatives have. Third-party delivery providers are taking 20%-30% of the money made through their platforms.14 In an industry reliant on slim margins, this can result in a massive impact on profitability. McDonald’s has attempted to mitigate this effect by expanding the number of platforms they deliver through as well as aligning their point-of-sale (POS) systems. In July of 2019, McDonald’s made a deal

with DoorDash which ended their exclusivity contract with Uber Eats.15 This has enabled them to reach a broader customer base and instill a level of competition between delivery providers to protect against exorbitant fees. Additionally, McDonald’s and their delivery partners operate on the same POS platform which has made for a smoother transaction experience, saving time and money. Not all businesses in the restaurant industry have had this same experience which leaves McDonald’s in a better position than many of its competitors when it comes to adopting third party delivery services. Breakfast The overall market for quick-service products has reached a stand-still for the most-part. The only growing market at the moment is breakfast, which has signaled a fight within the industry for that market share. Currently, before lunch sales equate to 25% of sales for MCD. While this is significant, management has admitted to lagging in breakfast initiatives in the past few years. They have stated their biggest challenge now is increasing those sales and their market share in the breakfast space. Recent moves include the introduction of new products and services to meet this increasing demand, including chicken breakfast sandwiches and all-day breakfast. There are two major obstacles stopping MCD from taking advantage of breakfast demand. First, there is a great deal of competition either in, or entering into, the breakfast space, like Dunkin’, Starbucks, Taco Bell, Jack in the Box, and now Wendy’s. The second obstacle is COVID-19. Work from home is eliminating commute in the morning, eliminating the opportunity to capture customers for the moment.

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Source: NPD Group Competitors McDonald’s main publicly-traded competitors within the quick-service industry include: Chipotle, Wendy’s, Yum! Brands, Domino’s Pizza, Starbucks, Jack in the Box, Dunkin’ Brands Group, and Restaurant Brands Intl. Franchised vs. Comp-Operated Mix: MCD’s re-franchising initiative is not unique. Nearly all of its peers have a similar structure, with Wendy’s, Yum!, and Domino’s nearly identical. The outliers are Chipotle and Starbucks, who don’t have a franchise system. While the two companies have experienced great success, not franchising is holding CMG back from taking a greater share of the QSR industry, as they simply don’t have the store count to do so, a major benefit of franchising. Likewise, Starbucks refusing to franchise, gives them more control over operations, but that comes at the cost of lower margins.

Source: Company 10-K’s Margins The benefit of the franchise structure is shown below. The two companies who don’t franchise, Chipotle and Starbucks, have by far the lowest margins. Meanwhile, while MCD has a few franchisee peers competing with its gross margin, nobody is close to their operating and net margins. This is due to MCD’s unique advantage of owning their own real-estate, thus not having to pay rent, as well as reducing SG&A costs over the years, through reduced head count.

Source: Company 10-K’s US vs. International: The other major avenue for margin growth is global expansion. The chart below shows where MCD’s peers are at in terms of geographic mix. Of the franchised brands, McDonald’s, Yum!, and Domino’s, have the greatest relative share of stores abroad. Its separators of margins seem to be franchising and expanding globally vs. domestically.

Source: Company 10-K’s Same-store sales growth: Yet another way the industry seeks to drive growth is through same-store sales growth. 2019 seemed to be a pretty good year for the QSR industry as all of MCD’s peers experienced positive same store sales growth. The three industry leaders being Chipotle, Starbucks, and McDonald’s. So, what drives this kind of growth in today’s day in age? After analyzing all of MCD’s peers, Starbucks and Chipotle may differ the most in terms of company structure and geographic segmentation. However, they are MCD’s most comparable peers on one specific level:

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technology. That technology is today’s avenue for growth in same store sales through the likes of digital orders and delivery. It’s not necessarily that these companies are getting new customers on their mobile apps or through third-party delivery services. Rather, it’s more the spike in check growth that the mobile orders produce. The average mobile transaction tends to be 2-3x that of in-person orders. Below is a chart comparing the industry’s digital leaders, which we believe is the primary driver of same-store sales growth currently. This chart looks at consensus estimates on same-store sales growth. The most important thing here is the proximity that MCD stays within of CMG and especially, Starbucks. We are predicting a 4-year average of 3% vs. consensus due to a more optimistic outlook on both the pandemic’s repercussions paired with their advanced technology.

Source: Statista

Executive Summary We believe MCD is undervalued by the market. Their superior leg up in technology and breakfast will provide them opportunities to steal market share and increase same store sales. Also, we believe their stock took too big off a hit following the outbreak of COVID-19, as the company’s cash flow is more secure than all of its peers due its unique ownership of the real estate franchisees operate on. For these reasons, we believe MCD is a BUY, with an upside of 15%.

Company Description With 38,695 restaurants in 120 countries, McDonald’s is the largest quick-service restaurant in the United States and globally. Notably, 93% of these restaurants are franchised. What sets McDonald’s apart from its peers is, not only does it get sales revenue from its operations, but also a significant portion of revenue from its real estate. McDonald’s not only gets a cut of sales from franchisees, but also rental fees. Corporate Strategy Refranchising: The company’s long-term goal is to be 95% franchised. This is due to the higher margins their franchised stores provide. They currently sit at 93% franchised, and we project them reaching 95% in 2024. Technology Advancement: First, recent acquisitions of Dynamic Yield and Apprente have been strategically aimed at improving the drive-thru via suggestive selling. These investments are paying off tremendously by decreasing wait times 20 seconds YOY, increasing customer satisfaction to all-time highs, and increasing checks. Second, The Experience of the Future initiative is modernizing nearly every one of McDonald’s stores, including the addition of self-order kiosks, another driver of check growth with its correlating to larger orders. Velocity Growth Plan: McDonald’s growth plan was introduced in 2017, with a purpose of accelerating themselves out of a steady-state and reinvigorate the brand through investing in key growth drivers. These drivers include the EOTF, delivery partnerships, mobile order apps, and rapid global store expansion. Share Buybacks: McDonald’s has been repurchasing a great deal of stock the past 5 years. The company has leveled off from its peak in 2016-2017, re-purchasing $5B of stock in 2019. Management recently announced they are suspending their current $15b buyback plan, citing the need for financial flexibility during the COVID-19 crisis. We project MCD will actually keep their share buybacks at a lower level in the coming years as well, as we believe it is in their best interest to ease up on their leverage

Company Analysis

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ratios, given our current economic outlook. We estimate a steady and conservative buyback program to be enacted, re-purchasing around $2.5b of common stock annually through 2024.

Company-Operated Stores McDonald’s currently operates 7% of its restaurants around the globe. That equates to 692 stores domestically and 1,962 stores domestically. The company is in the middle of a transition to only 5% of their stores globally being company-operated. We see them achieving this by 2024, declining company-operated store count domestically to 567 and internationally to 1,592. This transition has been a common strategy among many of McDonald’s peers. The rationale is simple: franchised stores create more profit, with less struggle. Their profit margins are 4x that of company-operated stores. This difference is thanks to increased operating costs with company-operated stores, like payroll and rent So, why keep any company-operated stores? They still remain a valuable source for maintaining standards and branding. They also benefit MCD by helping keep control over product lines and introduce new menu offerings at a faster pace. Franchised Stores 93% of McDonald’s stores today are franchised; 13,153 domestic and 22,887 international. We expect them to reach 95% franchised by 2024, tallying only a slight increase in franchise store count domestically with 13,167 stores, but a significant increase internationally at 27,887 additions as much more growth opportunities lie abroad. The main reason the franchise model has been so successful for MCD is not only do they receive royalties like their peers, but

they uniquely receive rent payments from their franchisees as they own the real estate for a significant portion of their stores. This helps shield the volatility of sales during things like a pandemic. McDonald’s receives several fees and payments from franchisees, broken down into initial fees and ongoing fees. Initial Fees

• Initial investment varies from $1mm to $2.2mmInitial franchise fee of $45,000

• Buying an existing franchisee’s restaurant: Down payment of 25% of the total cost

• Starting a new franchisee restaurant: Down payment of 40% of the total cost

Ongoing Fees

• Rent: McDonald’s charges their franchisees monthly rent. This can be either a base rent amount or based on sales.

• Royalties: 4% of monthly franchisee sales go to McDonald’s. This isn’t where they get their big bucks from though.

Life Cycle McDonald’s has been an industry leader for decades now. The company reached the mature point of its life cycle years ago. However, with recent technology acquisitions and perhaps hastened by the COVID-19 pandemic it appears MCD may be in another stage with high growth opportunities. Their acquisitions have positioned them well to excel and steal significant market share in this crisis. The numbers may not show it for 2020 or 2021, but these technology advancements were made at the perfect time and will pay off, whereas competitors are severely struggling in this time. This a major opportunity for McDonald’s to enter another stage of high growth and steal market share as other restaurants are closed down and struggle to adapt to a drive-thru and delivery once service base. Financial Summary McDonald’s financials were in a great state prior to the pandemic, which is reflected in 2019’s numbers, as well as January and February of 2020. Global

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same stores spiked 5.1%, highest in more than a decade. They carried this momentum right in 2020, with same store sales domestically up a wild 8.1% and globally 7.2%. 2020 Q1 was on pace to be McDonald’s best quarter in 8 years. The global emergence of COVID-19 in March led to a dramatic 13% drop in domestic same store sales and a whopping 22% drop globally. Overall, due to such a strong January and February, McDonald’s was actually able to eek out a slight gain in Q1 domestic same store sales at 0.1%, while taking a bigger hit globally with a 3.4% drop. McDonald’s recently cut their guidance for 2020 and the long-term due to the pandemic. However, we project $1.4B in capital expenditures, a major decrease from prior years. Geographic Breakdown McDonald’s has two primary operating segments, US and International Markets. The International Markets can be further broken into International Operated Markets and International Developmental Licensed Markets & Corporate.

U.S.: The U.S. accounted for 37.2% of 2019 revenue. We expect this share to increase in 2020 by nearly 1% due to more domestic stores remaining open during the crisis than international stores. However, we expect that share of total revenue to return to its decline in 2021with a 1.8% decrease as stores continues to close. We expect domestic revenue in 2021 to rebound very nicely following the pandemic with a 9% spike as traffic and checks increase. Following that, we see domestic revenue settling down to steady state of 2%, as check growth barely

nips out the 111 stores lost over the following 5 years. The U.S. currently accounts for 13,845 stores, 13,153 of which are franchised, and 692 company-operated. The overall store count here has been declining over the last several years due to an initiative to increase the share of stores abroad, due to their greater margins. Although we believe the domestic store closures will continue, we project MCD will shift their focus away from domestic franchisee closures as they attempt to recover sales from the pandemic and the franchisees provide stable, stress-free cash flows for MCD. Thus, we see MCD closing 125 domestic company-operated stores in the next 5 years, and actually adding a net count of 14 new franchised stores in the next 5 years. This is all part of the company’s long-term plan to get 95% franchised, which we see happening in 2024. Same-stores sales for the U.S. were up an impressive 5% in 2019, counteracting a 1.9% drop in guest count. We expect same store sales to be -4% for 2020 due to the pandemic, but rebound tremendously in 2021 with a 9.5% jump, before settling down to level between 2-3%. International Markets: Internationally, the company has 24,849 stores, 22,887 of which are franchised and 1,962 are company-operated. The overall store count abroad is rapidly increasing, with 908 stores added in 2019. The pandemic will greatly slow this expansion in 2020 with management cutting $1b in capital expenditures for the year. Therefore, we expect the addition of a mere 50 stores abroad in 2020. However, we see McDonald’s picking up right where it left off in 2019 again in 2021 and through 2024, as we project annual additions of around 900-1000. That equates to a whopping 4,600 new stores abroad in the next 5 years. This fits right into the company’s Velocity Growth Plan, as they look to capitalize on the market for greater margins abroad. Same-store sales experienced a really nice gain of 6.65% in 2019, thanks to not only check growth, but increasing guest count, contrary to the U.S. segment. Due to the pandemic, we foresee a hefty 8% drop in

2019 Revenue

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same store sales for 2020, due to a large drop in traffic. Similar to the U.S., we project same store sales to spike back up again in 2021, at a rate of 14% as guest count returns back to normal and positive check growth continues. We believe that growth will slow to a rate of 2% by 2024 as guest growth and check growth slows. Revenue for International Markets currently stands at 63% of overall revenue. That number has been declining the past few years, simply due to MCD’s refranchising plan. They had a much greater count of company-operated stores abroad, leading to a decrease of a greater count of stores there, hurting sales, despite positive traffic and check growth. We see the declining proportion of total sales continuing in 2020, dropping about 1%, due to the declining company-operated store count abroad and more store closures abroad than in the states. Alongside that, we predict revenue growth for the segment to decline by 8%, due to the previously mentioned reasons as well as just overall dents in traffic growth from the pandemic. We see International Markets turning the corner in 2021 both in sales and proportion of total sales, as the Velocity Growth Plan takes off again and re-franchising efforts abroad near their end. Due to these reasons, as well as continuing positive check and traffic growth, we see the segment increasing its share of total sales by 5% from 2020-2024, resulting in nearly a 67% share. Cost Structure: Suppliers: With the outbreak of COVID-19, supply chains have been put under tremendous pressure to stay operating. With outbreaks around U.S. factories, supply chain breakdown has quickly become one of the bigger risks MCD is faced with. Management has noted that so far, there have been no interruptions or issues globally with the supply chain. Key Commodities: Demand for key commodities in the quick-service industry is down. This has led to some of the lowest prices in 18 years. SG&A Costs: One of McDonald’s focuses starting in 2015 has been on reducing SG&A costs. A large piece of this reduction has been through decreasing employee head count, through automation technology such as self-order kiosks.

Source: CapIQ Capital Structure McDonald’s is very highly levered, very comparable to its peers, however. McDonald’s also maintains negative Shareholder’s Equity, thanks to their massive share buyback program. We expect this trend to continue, although at a slower pace in 2020 due to the suspension of share buybacks. Catalysts for Growth Technology Acquisitions and Developments Closure of Full-Service Restaurants Breakfast Velocity Growth Plan Refranchising Initiatives Key Investment Positives and Negatives: Positives:

• Unique competitive advantages in technology and real estate ownership, providing stable cash flow with tons of growth potential

• There are opportunities to steal market share which haven’t been there in years. Between demand for breakfast, full-service restaurants shutting down, and McDonald’s drive-thru

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expertise, MCD is better positioned than all of its peers.

Negatives: In the midst of rapid global expansion and already having massive exposure abroad, the firm is definitely feeling the hurt financially everywhere. Decreasing guest traffic in the US is concerning as check growth can only continue for so long.

Valuation Methodology The target price range for McDonald’s stock was derived from careful examination of the current economic outlook, industry trends, and several financial factors. By combining these factors, we were able to forecast MCD’s financial statements and use that information to conduct a number of valuations: discounted cash flow and economic profit, dividend discount model, and relative valuation. Revenue Decomposition When looking at revenues for McDonald’s, we decided to break it down by franchise vs company-operated stores. From there, we broke it down further into U.S. vs international sales. Other factors considered were the number of new stores projected to open as well as the percent change in same-store revenue each year. Given that McDonald’s is shifting away from company-operated stores towards a more franchise heavy model, revenue has been decreasing and is projected to continue falling for company-operated stores. While franchise revenues are projected to take a hit in 2020 due to the coronavirus, we expect a strong rebound in 2021 which will drive the total company revenue to increase 11%. Once the economy returns to a steady growth state in 2022, we project total revenues to grow between four and five percent.

Cost of Goods Sold When calculating the cost of goods sold (excluding depreciation and amortization), we took the figures from the past five years as a percentage of sales. By averaging these figures, we found that 44% of sales would be the most accurate representation of COGS during the forecasted years. Selling, General & Administrative The calculation of SG&A was done in the same manner as COGS. We determined that the SG&A expense for the previous five years was consistently between nine and ten percent. For the projected years, the SG&A expense will remain a flat 9.5% of sales. WACC The weighted average cost of capital for McDonald’s was computed using a 6.08% cost of equity with a 78.82% market value weight. Additionally, the after-tax cost of debt used was 1.58% with a 21.18% market value weight. This resulted in a WACC of 5.12% which was used to discount the cash flows in our DCF/EP model. Cost of Equity We were able to determine McDonald’s cost of equity using the capital asset pricing model (CAPM). To compute the beta, we took the average of the 5 year monthly, 3 year monthly, 1 year monthly, 5 year weekly, 3 year weekly, and 1 year weekly raw betas to arrive at a final value of 0.90. Additionally, we used the 10-year treasury yield of 0.66% for the risk-free rate and an equity risk premium of 6.02% retrieved from Aswath Damodaran. The combination of these inputs led us to a 6.08% cost of equity. Cost of Debt The cost of debt for McDonald’s was calculated using the yield on their 10-year bond to come up with a pre-tax cost of debt of 2.10%. From there, we applied a marginal tax rate of 24.90% to arrive at a 1.58% cost of debt.

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Sensitivity Analysis CV ROIC vs. WACC: Small changes in our WACC assumption make a far bigger difference those in CV ROIC assumptions. A 0.25% decrease in our WACC assumption changes the implied stock price by $20. Whereas, a 0.25% decrease in CV ROIC decreases the stock price a mere $0.64. Beta vs. ERP: Knowing the large impact WACC has on share price, it is important to analyze differences in assumptions that make up the WACC, two of those being MCD’s beta and equity risk premium. Changing by the beta by merely 0.05 would change our stock price by $22, a similar impact to the WACC. Also, a 0.25% change in ERP results in a $16 price chance, another large amount. These tables show just how sensitive models can be to WACC assumptions.

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References:

1. Taylor, D. B. (2020, February 13). A Timeline of the Coronavirus Pandemic. Retrieved from https://www.nytimes.com/article/coronavirus-timeline.html 2. 2020’s Black Swan: Coronavirus . (2020, February 28). Retrieved from www.goldmansachs.com/insights/pages/top-of-mind/coronavirus/report.pdf 3. CBOE Volatility Index (^VIX) Historical Data. (2020, April 21). Retrieved from https://finance.yahoo.com/quote/^VIX/history?p=^VIX 4. Jamerson, J. (2020, March 29). After Three Coronavirus Stimulus Packages, Congress Is Already Prepping Phase Four. Retrieved from https://www.wsj.com/articles/after-three-coronavirus-stimulus-packages-congress-is-already-prepping-phase-four-11585483203 5. Mervosh, S., Lu, D., & Swales, V. (2020, March 24). See Which States and Cities Have Told Residents to Stay at Home. Retrieved from https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html 6. CPI Home. (n.d.). Retrieved from https://www.bls.gov/cpi/ 7. Current US Inflation Rates: 2009-2020. (2020, April 10). Retrieved from https://www.usinflationcalculator.com/inflation/current-inflation-rates/ 8. Thompson, K. (2020, February 19). What's the Difference Between Fast Food & Fast Casual? Retrieved from https://www.thrillist.com/news/nation/difference-between-fast-food-vs-fast-casual-restaurants 9. Taylor, K. (2020, March 31). 3 million out of work, $25 billion lost: 8 figures reveal how the coronavirus pandemic is devastating restaurants across America. Retrieved from https://www.businessinsider.com/how-coronavirus-devastating-restaurants-across-us-2020-3#restaurants-have-lost-an-estimated-25-billion-in-sales-3 10. McDonnell, S. (2016, October 26). What Percentage of Sales Are From Drive Through Windows at Fast Food Restaurants? Retrieved from https://smallbusiness.chron.com/percentag

e-sales-drive-through-windows-fast-food-restaurants-75713.html 11. Ldanziger. (2020, March 9). The Number of Americans Eating Plant-Based Has Passed 9.7 Million. Retrieved from https://thebeet.com/the-number-of-americans-eating-plant-based-has-passed-9-7-million-survey-finds/ 12. Fast Food Restaurants Look to Turn Plant-Based Burgers Into Cash Cows. (2019, May 22). Retrieved from https://morningconsult.com/2019/05/15/fast-food-restaurants-look-to-turn-plant-based-burgers-into-cash-cows/ 13. Reuters. (2020, January 8). The Impossible Burger won't be coming to McDonald's anytime soon. Retrieved from https://www.nbcnews.com/business/business-news/impossible-burger-won-t-be-coming-mcdonald-s-anytime-soon-n1112291 14. The Delivery Dilemma Rages On for Restaurants. (n.d.). Retrieved from https://www.qsrmagazine.com/reports/delivery-dilemma-rages-restaurants 15. Maze, J. (2019, July 16). McDonald's adds another delivery provider. Retrieved from https://www.restaurantbusinessonline.com/financing/mcdonalds-adds-another-delivery-provider 16. Gross Domestic Product. (n.d.). Retrieved

from https://www.bea.gov/data/gdp/gross-domestic-product

10. ERS Charts of Note. (n.d.). Retrieved from https://www.ers.usda.gov/data-products/charts-of-note/charts-of-note/?topicId=14834 11. Whitten, S. (2018, June 7). McDonald's plans to lay off workers as it streamlines management. Retrieved from https://www.cnbc.com/2018/06/07/mcdonalds-plans-to-lay-off-workers-as-it-streamlines-management.html 12. Littman, J. (2019, October 22). McDonald's improves drive-thru times by 20 seconds. Retrieved from https://www.restaurantdive.com/news/mcdonalds-improves-drive-thru-times-by-20-seconds/565577/ 13. Inside the Plan to Fix McDonald's. (n.d.). Retrieved from https://www.qsrmagazine.com/reports/inside-plan-fix-mcdonalds 14. Team, T. (2011, August 9). McDonald's Gets Fat Returns On Franchised Stores, Little

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Meat From Company Joints. Retrieved from https://www.forbes.com/sites/greatspeculations/2010/06/22/mcdonalds-gets-fat-returns-on-franchised-stores-little-meat-from-company-joints/#b6f3969665b8 15. Daszkowski, D. (2019, March 13). What's Required to Open a McDonald's Franchise? Retrieved from https://www.thebalancesmb.com/requirements-to-open-a-mcdonald-s-franchise-1350970

McDonalds CorpRevenue Decomposition

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024ETotal Revenue 22,820$ 21,025$ 21,077$ 19,715 22,634 23,964 25,217 26,310

Change (in percent) -7.32% -7.87% 0.24% -6.46% 14.80% 5.88% 5.23% 4.33%

Same Store Sales Growth % 5.30% 4.50% 5.90% -6.00% 11.75% 3.50% 2.75% 2.00%

Company-operated sales:

U.S. 3,260$ 2,665$ 2,490$ 2,177 1,904 1,664 1,455 1,272

Change (in percent) -12.88% -18.25% -6.57% -12.57% -12.57% -12.57% -12.57% -12.57%

% of Revenue 14.29% 12.68% 11.81% 11.04% 8.41% 6.95% 5.77% 4.84%

Number of stores 842 696 692 667 642 617 592 567

Change (in percent) -25.63% -17.34% -0.57% -3.61% -3.75% -3.89% -4.05% -4.22%

Revenue per store 3.87$ 3.83$ 3.60$ 3.26$ 2.96$ 2.70$ 2.46$ 2.24$

International Markets 9,459$ 7,348$ 6,931$ 5,866 4,965 4,202 3,556 3,010

Change (in percent) -18.10% -22.32% -5.68% -15.36% -15.36% -15.36% -15.36% -15.36%

% of Revenue 41.45% 34.95% 32.88% 29.75% 21.94% 17.53% 14.10% 11.44%

Number of stores 2,226 2,123 1,962 1,912.00 1,812.00 1,712.00 1,702.00 1,692.00

Change (in percent) -51.65% -4.63% -7.58% -2.55% -5.23% -5.52% -0.58% -0.59%

Revenue per store 4.25$ 3.46$ 3.53$ 3.07$ 2.74$ 2.45$ 2.09$ 1.78$ Total 12,719$ 10,013$ 9,421$ 8,043$ 6,868$ 5,866$ 5,012$ 4,282$ Company Operated Stores as % of Total Stores 8.24% 7.45% 6.86% 6.66% 6.20% 5.75% 5.53% 5.33%

Franchised revenues:

U.S. 4,746$ 5,001$ 5,353$ $ 5,668 $ 6,001 $ 6,354 $ 6,728 $ 7,123

Change (in percent) 5.23% 5.37% 7.04% 5.88% 5.88% 5.88% 5.88% 5.88%

% of Revenue 20.80% 23.79% 25.40% 28.75% 26.51% 26.51% 26.68% 27.07%

Number of stores 13,194 13,218 13,153 13,153 13,167 13,167 13,167 13,167

Change (in percent) 1.31% 0.18% -0.49% 0.00% 0.11% 0.00% 0.00% 0.00%

Revenue per store 0.36$ 0.38$ 0.41$ 0.43$ 0.46$ 0.48$ 0.51$ 0.54$

International Markets 5,355$ 6,011$ 6,303$ $ 6,898 $ 7,548 $ 8,260 $ 9,039 $ 9,892

Change (in percent) 11.19% 12.25% 4.86% 9.43% 9.43% 9.43% 9.43% 9.43%

% of Revenue 23.47% 28.59% 29.91% 34.99% 33.35% 34.47% 35.85% 37.60%

Number of stores 20,979 21,818 22,887 22,987 23,987 24,987 25,987 26,987

Change (in percent) 15.64% 4.00% 4.90% 0.44% 4.35% 4.17% 4.00% 3.85%

Revenue per store 0.26$ 0.28$ 0.28$ 0.30$ 0.31$ 0.33$ 0.35$ 0.37$ Total 10,101$ 11,012$ 11,656$ 12,565$ ###### 14,614$ 15,767$ 17,015$ Franchised Stores as % of Total Stores 91.76% 92.55% 93.14% 93.34% 93.80% 94.25% 94.47% 94.67%

Segments

United States 8,006$ 7,666$ 7,843$ 7,516$ 8,223$ 8,454$ 8,650$ 8,807$

% of Revenue 35.08% 36.46% 37.21% 38.12% 36.33% 35.28% 34.30% 33.47%

Same Store Sales Growth % 3.60% 2.50% 5.00% -4.00% 9.50% 3.00% 2.50% 2.00%

# of Total Stores 14,036 13,914 13,845 13,820 13,809 13,784 13,759 13,734

Revenue per store (same store sales) 0.57$ 0.55$ 0.57$ 0.54$ 0.60$ 0.61$ 0.63$ 0.64$

International Markets 14,814$ 13,359$ 13,234$ 12,200$ ###### 15,510$ 16,567$ 17,503$

% of Revenue 64.92% 63.54% 62.79% 61.88% 63.67% 64.72% 65.70% 66.53%

Same Stores Sales Growth % 6.80% 5.85% 6.65% -8.00% 14.00% 4.00% 3.00% 2.00%

# of Total Stores 23,205 23,941 24,849 24,899 25,799 26,699 27,689 28,679

Revenue per store (same store sales) 0.64$ 0.56$ 0.53$ 0.49$ 0.56$ 0.58$ 0.60$ 0.61$

Total Revenue 22,820$ 21,025$ 21,077$ 19,715$ ###### 23,964$ 25,217$ 26,310$

Total Stores 37,241 37,855 38,694 38,719 39,608 40,483 41,448 42,413

New Stores 614 839 25 889 875 965 965

McDonalds Corp

Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Sales 22,820 21,025 21,077 19,715 22,634 23,964 25,217 26,310

Growth -7.32% -7.87% 0.24% -6.46% 14.80% 5.88% 5.23% 4.33%

COGS (Excluding D&A) 10,836 8,757 8,343 8,674.80 9,958.78 10,544.24 11,095.69 11,576.39

Depreciation 1,228 1,303 1,392 1593.7 1504.43 1604.57 1695.79 1800.77

Amortization of Intangibles 136 179 226 130.51 124.15 118.10 112.34 106.87

D&A 1,363 1,482 1,618 1,724 1,629 1,723 1,808 1,908

Gross Income 10,620.8 10,786.0 11,115.3 9,316.5 11,046.2 11,697.3 12,313.7 12,826.0

SG&A Expenses 2,231.3 2,200.2 2,229.4 1880.54 2158.88 2285.80 2405.34 2509.55

EBIT (Operating Income) 8,389.5 8,585.8 8,885.9 7,435.9 8,887.3 9,411.5 9,908.3 10,316.4

Interest Income 142.8 264.0 122.0 15.6 55.3 45.8 61.9 99.3

Interest expense 920.8 980 1132.3 750.005676 827.0555149 816.7257535 863.3564378 959.6022752

Unusual Expense - Net -771.3 209.2 -23.4 0 0 0 0 0

Pretax Income 8,573.0 7,816.1 8,018.1 6,701.6 8,005.0 8,549.0 8,983.1 9,257.5

Income Taxes 3,381.2 1,891.8 1,992.7 1668.7 1993.237157 2128.692108 2236.780309 2305.122445

Net Income 5,191.8 5,924.3 6,025.4 5,032.9 6,011.7 6,420.3 6,746.3 6,952.4

Per share

EPS (Recurring) 6.44 7.59 7.88 6.85 8.30 8.99 9.57 9.99

Common Shares Outstanding 794.10 767.10 746.30 734.76 724.03 714.05 704.79 696.20

Weighted Average Shares Outstanding 806.70 780.60 764.90 734.76 724.03 714.05 704.79 696.20

Dividends Per Share 3.83 4.19 4.73 5.00 5.20 5.40 5.60 5.80

Total Dividends Paid 3137.92 3327.28 3628.38 3731.50 3820.77 3909.76 3998.70 4087.78

McDonalds CorpBalance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024EAssets

Cash and Cash Equivalents 2,464 866 899 6,668 4,939 7,050 12,330 11,194Accounts Receivables 1,976 2,442 2,224 1,856 2,130 2,256 2,374 2,476

Inventories 59 51 50 42 49 51 54 56

Prepaid Expenses and Other Current Assets 828 695 385 539 619 655 690 720

Total Current Assets 5,327 4,053 3,558 9,105 7,737 10,013 15,447 14,447

Net Property, Plant & Equipment 22,448 22,843 26,857 25,353 27,041 28,578 30,347 32,011Property, Plant & Equipment - Gross 36,626 37,194 52,312 52,404 55,657 58,858 62,389 65,921

Operating Lease 10,312 10,636 10,564 10,566 10,627 10,687 10,753 10,819

Accumulated depreciation and amortization 14178 14351 14891 16485 17989 19594 21289 23090LT - Total Investments and Advances 1,086 1,203 1,471 1,714 1,998 2,328 2,714 3,162

Intangible Assets / Goodwill 2,380 2,332 2,677 2,547 2,423 2,305 2,192 2,085

Deferred Tax Assets 868 1,219 1,139 544 650 694 730 752

Other Assets 1,695 1,162 1,244 1,023 1,175 1,244 1,309 1,365Total Assets 33,804 32,811 47,511 50,852 51,649 55,848 63,491 64,642

Liabilities and Shareholders' Equity

ST Debt & Curr. Portion LT Debt 0 0 680 59 2,132 2,250 6,007 2,819

Accounts Payable 925 1,208 988 760 873 924 972 1,015

Income Tax Payable 266 228 332 189 226 242 254 262Accrued Payroll 1,146 987 1,026 1,013 1,163 1,231 1,295 1,352

Misc. Current Liabilities 554 551 595 491 563 596 627 655Total current liabilities 2,891 2,974 3,621 2,512 4,957 5,243 9,156 6,101Long-term debt 29,536 31,075 46,876 52,383 49,655 52,493 54,839 57,495

Deferred Tax Liabilities 1,119 1,216 1,318 1,237 1,477 1,578 1,658 1,708

Deferred Income 628 661 603 693 733 772 805

Other liabilities 3,525 3,178 3,246 3,020 3,467 3,671 3,863 4,031

Total Liabilities 37,072 39,070 55,721 59,755 60,249 63,719 70,288 70,141

Common Equity

Common stock / APIC 7,089 7,393 7,671 8,027 8,401 8,791 9,200 9,628Retained earnings 48,326 50,487 52,931 54,381 56,811 59,650 62,814 66,185

Accumulated other comprehensive income / loss -2,178 -2,609 -2,483 -2,483 -2,483 -2,483 -2,483 -2,483

Treasury Stock -56,504 -61,529 -66,329 -68,829 -71,329 -73,829 -76,329 -78,829

Total Shareholders' Equity -3,268 -6,258 -8,210 -8,903 -8,599 -7,870 -6,797 -5,498Total Liabilities & Shareholders' Equity 33,804 32,811 47,511 50,852 51,649 55,848 63,491 64,642

McDonalds CorpHistorical Cash Flow Statement

Fiscal Years Ending Dec. 31 2017 2018 2019Operating Activities

Net Income / Starting Line 5,192 5,924 6,025

Depreciation, Depletion & Amortization 1,363 1,482 1,618

Deferred Taxes -36 103 150

Amortization of Intangible Assets

Other Funds 12 -70 31

Changes in Working Capital -981 -473 299

Accounts receivable -341 -479 27

Accounts payable -60 129 -27

Income taxes payable -396 -33 173

Other accrued liabilities -146 -87 -4

Other Assets/Liabilities -37 -2 129

Net Operating Cash Flow 5,551 6,967 8,122

Investing Activities

Capital Expenditures -1,853.7 -2,741.7 -2,393.7

Net Assets from Acquisitions -77.0 -101.7 -540.9

Sale of Fixed Assets & Businesses 2,738.6 691.2 492.0

-71.9 -302.9 -628.5

Net Investing Cash Flow 736 -2,455 -3,071

Financing Activities

Cash Dividends Paid -3,089 -3,256 -3,582

Common Dividends -3,089 -3,256 -3,582

Change in Capital Stock -4,229 -4,805 -4,626

Repurchase of Common & Preferred Stock -4,686 -5,208 -4,976

Sale of Common & Preferred Stock 457 403 351

Proceeds from Stock Options 457 403 351

Issuance/Reduction of Debt, Net 2,028 2,131 3,236

Change in Current Debt -1,050 96 799

Change in Long-Term Debt 3,078 2,035 2,437

Issuance of Long-Term Debt 4,728 3,795 4,499

Reduction in Long-Term Debt -1,649 -1,760 -2,062

Other Funds -21 -20 -24

Other Uses -21 -20 -24

Other Sources

Net Financing Cash Flow -5,311 -5,950 -4,995

Exchange Rate Effect 264.0 -159.8 -23.7

Net Change in Cash 1,240 -1,598 32

Free Cash Flow 3,698 4,225 5,728

Free Cash Flow per Share 4.6 5.4 7.5

Free Cash Flow Yield (%) 2.63% 3.03% 3.79%

McDonalds CorpForecasted Cash Flow Statement

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024EOperating Activities

Net Income / Starting Line 5033 6012 6420 6746 6952Depreciation 1594 1504 1605 1696 1801Amortization of Intangibles 131 124 118 112 107Changes in Working Capital AccountsChange in Deferred Taxes 513 135 56 45 28Change in Accounts Recievable 369 -275 -125 -118 -103Change in Inventory 8 -6 -3 -3 -2Change in Prepaid Expenses and Other Current Assets -154 -80 -36 -34 -30Change in Accounts Payable -228 113 51 48 42Change in Income Taxes Payable -142 37 15 12 8Changed in Deferred Income -57 89 41 38 33Change in Accrued Compensation and MIsc Current/Other Liabilities -343 670 305 288 251Net Cash Provided by Operating Activities 6722 8322 8447 8831 9087

Investing Activities Change in LT Investments -243 -284 -330 -385 -449Capital Expenditures -91 -3253 -3202 -3531 -3531(Increase) Decrease in Other Assets 221 -151 -69 -65 -57Net Cash Provided by Investing Activities -114 -3688 -3601 -3981 -4037

Financing ActivitiesST debt and current portion of long-term debt -621 2073 118 3757 -3188Long-term debt 5507 -2728 2839 2346 2656Payment of dividends -3582 -3582 -3582 -3582 -3582Proceeds from issuance of common stock (ESOP) 357 373 391 409 428Repurchases of Common Stock -2500 -2500 -2500 -2500 -2500Changes in accumulated other comprehensive income 0 0 0 0 0Net Cash provided by financing activities -840 -6363 -2734 430 -6186

Net Change in Cash 5769 -1729 2112 5279 -1135Beginning Cash 899 6668 4939 7050 12330Ending Cash 6668 4939 7050 12330 11194

McDonalds CorpCommon Size Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024ESales 22,820.4 21,025.2 21,076.5 19,715.5 22,633.6 23,964.2 25,217.5 26,310.0

Sales 100% 100% 100% 100% 100% 100% 100% 100%

COGS (Excluding D&A) 47.48% 41.65% 39.59% 44.00% 44.00% 44.00% 44.00% 44.00%

Depreciation 5.38% 6.20% 6.61% 8.08% 6.65% 6.70% 6.72% 6.84%

Amortization of Intangibles 0.60% 0.85% 1.07% 0.66% 0.55% 0.49% 0.45% 0.41%

Gross Income 46.54% 51.30% 52.74% 47.25% 48.80% 48.81% 48.83% 48.75%

SG&A Expenses 9.78% 10.46% 10.58% 9.54% 9.54% 9.54% 9.54% 9.54%

EBIT (Operating Income) 36.76% 40.84% 42.16% 37.72% 39.27% 39.27% 39.29% 39.21%

Other Income (Expense) 0.63% 1.26% 0.58% 0.08% 0.24% 0.19% 0.25% 0.38%

Interest expense 4.03% 4.66% 5.37% 3.80% 3.65% 3.41% 3.42% 3.65%

Pretax Income 37.57% 37.17% 38.04% 33.99% 35.37% 35.67% 35.62% 35.19%

Income Taxes 14.82% 9.00% 9.45% 8.46% 8.81% 8.88% 8.87% 8.76%

Net Income 22.75% 28.18% 28.59% 25.53% 26.56% 26.79% 26.75% 26.42%

McDonalds CorpCommon Size Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024ESales 22,820 21,025 21,077 19715.463 22633.581 23964.178 25217.467 26309.984Assets

Cash

Accounts Receivables, Net 8.66% 11.61% 10.55% 9.41% 9.41% 9.41% 9.41% 9.41%

Inventories 0.26% 0.24% 0.24% 0.21% 0.21% 0.21% 0.21% 0.21%

Other current assets 3.63% 3.30% 1.83% 2.73% 2.73% 2.73% 2.73% 2.73%

Total Current Assets 23.34% 19.28% 16.88% 46.18% 34.18% 41.78% 61.25% 54.91%

Net Property, Plant & Equipment 98.37% 108.64% 127.43% 128.59% 119.47% 119.25% 120.34% 121.67%

Property, Plant & Equipment - Gross 160.50% 176.90% 248.20% 265.80% 245.90% 245.61% 247.41% 250.55%

Accumulated depreciation and amortization 62.13% 68.26% 70.65% 83.61% 79.48% 81.76% 84.42% 87.76%

LT - Total Investments and Advances 4.76% 5.72% 6.98% 8.70% 8.83% 9.72% 10.76% 12.02%

Intangible Assets 10.43% 11.09% 12.70% 12.92% 10.70% 9.62% 8.69% 7.93%

Deferred Tax Assets 3.80% 5.80% 5.40% 2.76% 2.87% 2.90% 2.89% 2.86%

Other Assets 7.43% 5.52% 5.90% 5.19% 5.19% 5.19% 5.19% 5.19%

Total Assets 148.13% 156.06% 225.42% 257.93% 228.20% 233.05% 251.77% 245.69%

Liabilities and Shareholders' Equity

ST Debt & Curr. Portion LT Debt 0.00% 0.00% 3.23% 0.30% 9.42% 9.39% 23.82% 10.71%

Accounts Payable 4.05% 5.75% 4.69% 3.86% 3.86% 3.86% 3.86% 3.86%

Income Tax Payable 1.16% 1.09% 1.57% 0.96% 1.00% 1.01% 1.01% 0.99%

Misc. Current Liabilities 2.43% 2.62% 2.82% 2.49% 2.49% 2.49% 2.49% 2.49%

Accrued Payroll 5.02% 4.69% 4.87% 5.14% 5.14% 5.14% 5.14% 5.14%

Lease Liability

Total current liabilities 12.67% 14.14% 17.18% 12.74% 21.90% 21.88% 36.31% 23.19%

Long-term debt 129.43% 147.80% 222.41% 265.69% 219.38% 219.05% 217.46% 218.53%

Deferred Tax Liabilities 4.91% 5.78% 6.25% 6.27% 6.53% 6.58% 6.57% 6.49%

Deferred Income 2.99% 3.13% 3.06% 3.06% 3.06% 3.06% 3.06%

Other liabilities 15.45% 15.11% 15.40% 15.32% 15.32% 15.32% 15.32% 15.32%

Total Liabilities 162.45% 185.82% 264.38% 303.09% 266.19% 265.89% 278.73% 266.59%

Common Equity

Common stock / APIC 31.06% 35.16% 36.39% 40.72% 37.12% 36.69% 36.48% 36.60%

Retained earnings 211.77% 240.13% 251.14% 275.83% 251.00% 248.91% 249.09% 251.56%

Accumulated other comprehensive income / loss -9.55% -12.41% -11.78% -12.59% -10.97% -10.36% -9.85% -9.44%

Treasury Stock -247.60% -292.64% -314.70% -349.11% -315.15% -308.08% -302.68% -299.61%

Total Shareholders' Equity -14.32% -29.77% -38.95% -45.16% -37.99% -32.84% -26.95% -20.90%

Total Liabilities & Shareholders' Equity 148.13% 156.06% 225.42% 257.93% 228.20% 233.05% 251.77% 245.69%

McDonalds CorpWeighted Average Cost of Capital (WACC) Estimation

Cost of Equity:Risk-Free Rate 0.66%Beta 0.90 Equity Risk Premium 6.02%Cost of Equity 6.08%

Cost of Debt:Risk-Free Rate 0.66%Implied Default Premium 1.44%Pre-Tax Cost of Debt 2.10%Marginal Tax Rate 24.90%After-Tax Cost of Debt 1.58%

Market Value of Common Equity: MV WeightsTotal Shares Outstanding 746.30 Current Stock Price $184.43MV of Equity 137,640.11 78.82%

Market Value of Debt:Short-Term Debt 680Current Portion of LTDLong-Term Debt 46,876PV of Operating Leases 10,564MV of Total Debt 36,991.65 21.18%

Market Value of the Firm 174,631.75 100.00%

Estimated WACC 5.12%

McDonalds CorpDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT (g) 2.00% NOPLATt 7,791$ g/ROIC 0.135 CV Year ROIC (ROIC) 14.82% EPt 5,096$ ROIC-WACC 0.097 WACC 5.12% WACC-g 0.031 Cost of Equity 6.08%

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024CV

DCF Model:Free Cash Flow (FCF) 7054.3 4361.7 5126.3 5114.4 5577.6Continuing Value (CV) 215,683.55 PV of FCF 6710.5 3946.8 4412.5 4187.7 176603.7

Value of Operating Assets: 195,861 Non-Operating Adjustments: 477.0

Investments 1471.0Pension (Underfunded) -42.3MV of Debt 36991.6Contigent Liability 75.0PV of ESOP 696.3

Value of Equity 160,003.88 Shares Outstanding 746.3Intrinsic Value of Last FYE 214.40$ Implied Price as of Today 216.58$

Difference -$ EP Model: BEG IC 52,587.60$

Economic Profit (EP) 2980.2 4513.3 4635.9 4904.8 5096.1Continuing Value (CV) 163,095.95 PV of EP 2834.9 4084.0 3990.5 4016.1 133544.5

Total PV of EP 148470.0Invested Capital (last FYE) 47391.1Value of Operating Assets: 195861.1Non-Operating Adjustments 477.0

Investments 1471.0Pension (Underfunded) -42.3MV of Debt 36991.6Contigent Liability 75.0PV of ESOP 696.3

Value of Equity 160,003.88 Shares Outstanding 746.3Intrinsic Value of Last FYE 214.40$ Implied Price as of Today 216.58$

McDonalds CorpDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024CV

EPS 6.85$ 8.30$ 8.99$ 9.57$ 9.99$

Key Assumptions CV growth of EPS 2.00% CV Year ROE -126.44% Cost of Equity 6.08%

Future Cash Flows P/E Multiple (CV Year) 24.90969 EPS (CV Year) 9.99$ Future Stock Price 248.75$ Dividends Per Share 5.00 5.20 5.40 5.60 5.80Discounted Value 1.06 1.13 1.19 1.27 1.34 Discounted Cash Flows 4.714$ 4.621$ 4.524$ 4.423$ 196.457$

Intrinsic Value as of Last FYE 214.74$ Implied Price as of Today 216.92$

McDonalds CorpRelative Valuation Models

EPS EPS 2019 2019 2019 2019Ticker Company Price 2020E 2021E P/E 20 P/E 21 EV EBITDA EV/EBITDA Total Debt Total Debt/EBITDAYUM YUM! Brands $63.30 $3.56 $4.18 17.78 15.14 42054.5 2,051.00 20.50 11,269.00 5.49 SBUX Starbucks $63.05 $2.47 $3.12 25.53 20.21 117518.6 5,724.40 20.53 11,234.90 1.96 WEN Wendy's $13.06 $0.47 $0.64 27.79 20.41 8576.0 412.79 20.78 3,713.68 9.00 YUMC Yum China Holdings $41.29 $0.78 $2.00 52.94 20.65 16672.5 906.14 18.40 2,211.00 2.44 CMG Chipotle $611.01 $15.29 $21.89 39.96 27.91 19261.9 775.32 24.84 2,854.14 3.68 QSR Restaurant Brands Intl. $43.90 $2.41 $2.96 18.22 14.83 30731.2 2,304.00 13.34 12,148.00 5.27 DNKN Dunkin' Brands Group $57.92 $2.81 $3.27 20.61 17.71 6961.0 488.00 14.26 3,035.00 6.22 DPZ Domino's Pizza $343.64 $10.61 $11.94 32.39 28.78 17364.0 690.00 25.17 4,124.00 5.98 JACK Jack in the Box $31.84 $2.83 $4.54 11.25 7.01 3346.8 229.91 14.56 1,275.15 5.55

Average 29.26 23.00 1,509.06 19.15 5,762.76 5.07

MCD McDonalds Corp $178.43 $6.85 $8.30 26.0 21.5 197,809 10,503.8 18.832 36991.65 3.52

Implied Relative Value: Relative Debt: P/E (EPS20) $ 200.39 Comparables Debt/EBITDA 5.07 P/E (EPS21) 191.01$ Debt/EBITDA 3.52 EV/EBITDA

Enterprise Value 201,179.69$ Less: Debt 36,991.65$ Plus: Cash 476.97$ Equity Value 164,665.01$ Price Per Share 220.64$

Mean Relative Valuation 204.01$

Mcdonalds CorpValue Driver Estimation

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

NOPLAT:Sales 22820.40 21025.20 21076.50 19715.46 22633.58 23964.18 25217.47 26309.98

Cost of Sales 10836.20 8757.20 8343.30 8674.80 9958.78 10544.24 11095.69 11576.39SG&A 2231.30 2200.20 2229.40 1880.54 2158.88 2285.80 2405.34 2509.55D&A 1363.40 1482.00 1617.90 1724.18 1628.58 1722.67 1808.13 1907.63Implied Interest on Operating Leases 226.02 216.55 223.35 221.85 221.81 220.22 218.66 216.94

EBITA 8163.48 8369.25 8662.55 7214.09 8665.54 9191.25 9689.65 10099.47Income Tax Provision 3381.20 1891.80 1992.70 1668.69 1993.24 2128.69 2236.78 2305.12

Add: Tax Shield on Interest Expense 56.28 53.92 55.61 55.24 55.23 54.84 54.45 54.02Less: Adjusted Taxes 3437.48 1945.72 2048.31 1723.93 2048.47 2183.53 2291.23 2359.14Add: Change in Deferred Taxes -697.70 96.10 102.60 -81.34 240.54 100.39 80.11 50.65NOPLAT 4028.30 6519.63 6716.84 5408.82 6857.61 7108.12 7478.53 7790.98

Invested Capital (IC):Operating Current Assets:

Normal Cash (2% of Sales) 456.4 420.5 421.5 394.31 452.67 479.28 504.35 526.20Accounts Receivable 1976.2 2441.5 2224.2 1855.67 2130.33 2255.57 2373.53 2476.36Inventories 58.8 51.1 50.2 42.31 48.57 51.42 54.11 56.46Prepaid Expenses & Other Current Assets 828.4 694.6 385.0 539.20 619.01 655.40 689.68 719.56

Operating Current Liabilities:Accounts Payable 924.8 1207.9 988.2 760.22 872.74 924.05 972.38 1014.51Income Taxes Payable 265.8 228.3 331.7 189.42 226.26 241.64 253.91 261.67Miscellaneous Current Liabilities 553.8 550.7 595.4 490.5 563.1 596.3 627.4 654.6Accrued Liabilities 1146.2 986.6 1035.7 1025.60 1012.82 1162.73 1231.09 1295.47

Net Operating Working Capital 429.2 634.2 129.9 365.7 575.6 517.0 536.9 552.3Plus: Net PPE 22448.3 22842.7 26856.8 25352.93943 27040.55268 28577.75543 30346.89538 32011.05548Plus: Operating Leases (ROU Asset) 10311.8 10635.7 10564.4 10562.2 10486.7 10412.4 10330.5 10248.6Plus: Net Other Operating Assets 828.4 694.6 385.0 539.2 619.0 655.4 689.7 719.6Plus: Non-Goodwill Intangibles

PV of Operating Leases 9170.0 9715.0 9455.0 8925.5 9519.7 10060.8 10683.7 11269.5Invested Capital 43188 44522 47391 45746 48242 50223 52588 54801

Free Cash Flow (FCF):NOPLAT 4028.30 6519.63 6716.84 5408.82 6857.61 7108.12 7478.53 7790.98Change in IC -12883 1335 2869 -1646 2496 1982 2364 2213FCF 16911.25 5185.11 3847.89 7054.33 4361.65 5126.25 5114.37 5577.56

Return on Invested Capital (ROIC):NOPLAT 4028 6520 6717 5409 6858 7108 7479 7791Beg. IC 56,070.61$ 43,187.66$ 44,522.19$ 47,391.13$ 45,745.61$ 48,241.57$ 50,223.44$ 52,587.60$ ROIC 7.18% 15.10% 15.09% 11.41% 14.99% 14.73% 14.89% 14.815239%

Economic Profit (EP):Beg. IC 56071 43188 44522 47391 45746 48242 50223 52588x (ROIC - WACC) 2.1% 10.0% 10.0% 6.3% 9.9% 9.6% 9.8% 9.7%EP $ 1,154.91 $ 4,306.44 $ 4,435.26 $ 2,980.22 $ 4,513.34 $ 4,635.93 $ 4,904.79 $ 5,096.08

McDonalds CorpKey Management Ratios

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Liquidity Ratios:Current Ratio (Current Assets/Current Liabilities) 1.84 1.36 0.98 3.62 1.56 1.91 1.69 2.37Cash Ratio (Cash+Cash Equivalents)/Current Liabilities 0.85 0.29 0.25 2.65 1.00 1.34 1.35 1.83Quick Ratio (Cash+AR)/Current Liabilities 1.54 1.11 0.86 3.39 1.43 1.77 1.61 2.24

Asset-Management Ratios:Asset Turnover (Rev/Avg Total Assets) 0.72 0.63 0.52 0.40 0.44 0.45 0.42 0.41Receivables Turnover (Rev/Avg Accts Rec) 9.27 6.58 5.93 6.25 7.75 7.36 7.33 7.28IC TurnoverInventory Turnover

Financial Leverage Ratios:Debt to Assets (Debt/Assets) 0.87 0.95 1.00 1.03 1.00 0.98 0.96 0.93Debt to Equity (Debt/Equity) -9.04 -4.97 -5.79 -5.89 -6.02 -6.96 -8.95 -10.97Equity Ratio (Total Equity/Total Assets) -0.61 -1.54 -2.31 -0.98 -1.11 -0.79 -0.44 -0.38

Profitability Ratios:Gross margin (Rev-COGS-SGA)/Rev 42.74% 47.88% 49.84% 46.46% 46.46% 46.46% 46.46% 46.46%Net Profit Margin (NI/Revenue) 22.75% 28.18% 28.59% 25.53% 26.56% 26.79% 26.75% 26.42%ROA (NI/Total Assets) 15.36% 18.06% 12.68% 9.90% 11.64% 11.50% 10.63% 10.76%ROE (NI/Shareholder's Equity) -158.89% -94.66% -73.39% -56.53% -69.91% -81.58% -99.26% -126.44%

Payout Policy Ratios:Dividend Payout Ratio (Dividends/NI) 60.44% 56.16% 60.22% 74.14% 63.56% 60.90% 59.27% 58.80%Total Payout Ratio ((Divs. + Repurchases)/NI) 150.69% 144.07% 142.81% 74.14% 63.56% 60.90% 59.27% 58.80%

McDonalds CorpSensitivity Tables

216.58 0.54 0.59 0.64 0.69 0.74 0.79 0.84 7.65% 344.83 295.45 257.04 227.07 201.16 180.21 162.47 7.90% 325.87 279.55 243.39 215.10 190.57 170.69 153.84 8.15% 308.64 265.06 230.91 204.11 180.84 161.94 145.89 8.40% 292.93 251.78 219.44 194.00 171.86 153.84 138.53 8.65% 278.53 239.57 208.86 184.66 163.55 146.35 131.70 8.90% 265.29 228.31 199.09 176.00 155.83 139.38 125.35 9.15% 253.08 217.90 190.03 167.96 148.66 132.88 119.42

216.58 0.32% 0.42% 0.52% 0.62% 0.72% 0.82% 0.92%1.60% 216.12 209.89 203.94 198.26 192.84 187.64 182.67 1.70% 221.81 215.25 209.00 203.05 197.36 191.93 186.73 1.80% 227.87 220.96 214.38 208.12 202.16 196.46 191.02 2.00% 241.26 233.54 226.21 219.26 212.65 206.37 200.37 2.10% 248.69 240.49 232.74 225.39 218.41 211.79 205.49 2.20% 256.67 247.95 239.72 231.94 224.56 217.57 210.93 2.30% 265.28 255.98 247.22 238.96 231.14 223.74 216.72

216.58 12.71% 12.96% 13.21% 13.46% 13.71% 13.96% 14.21%4.22% 302.29 303.52 304.69 305.84 306.92 307.97 308.98 4.47% 269.67 270.76 271.81 272.83 273.79 274.72 275.63 4.72% 243.42 244.40 245.34 246.26 247.12 247.96 248.78 4.94% 224.44 225.34 226.20 227.05 227.84 228.61 229.36 5.22% 203.90 204.72 205.50 206.26 206.97 207.67 208.34 5.47% 188.70 189.45 190.17 190.87 191.52 192.17 192.78 5.72% 175.69 176.38 177.05 177.69 178.30 178.89 179.46

216.58 24.60% 24.70% 24.80% 24.90% 25.00% 25.10% 25.20%1.80% 222.10 221.74 221.38 221.02 220.66 220.30 219.94 1.90% 220.59 220.24 219.88 219.53 219.17 218.82 218.46

2% 219.10 218.75 218.40 218.05 217.69 217.34 216.99 2.10% 217.62 217.27 216.92 216.58 216.23 215.89 215.54 2.20% 216.15 215.81 215.47 215.13 214.78 214.44 214.10 2.30% 214.70 214.36 214.02 213.69 213.35 213.01 212.67 2.40% 213.26 212.93 212.60 212.26 211.93 211.60 211.26

216.58 3.33% 3.63% 3.93% 4.23% 4.53% 4.83% 5.13%39.87% 249.66 249.66 249.66 249.66 249.66 249.66 249.66 40.12% 247.66 247.66 247.66 247.66 247.66 247.66 247.66 40.37% 245.66 245.66 245.66 245.66 245.66 245.66 245.66 40.62% 243.67 243.67 243.67 243.67 243.67 243.67 243.67 40.87% 241.65 241.65 241.65 241.65 241.65 241.65 241.65 41.12% 239.65 239.65 239.65 239.65 239.65 239.65 239.65 41.37% 237.65 237.65 237.65 237.65 237.65 237.65 237.65

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Revenue Growth

CV G

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McDonalds CorpPresent Value of Operating Lease Obligations

Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Year 1 1119.0 1200.0 1247.0 1352.0 1440.0 1382.0 1350.0 1303.0 1152.0 1145.0 1147.0Year 2 1047.0 1116.0 1167.0 1259.0 1334.0 1289.0 1235.0 1200.0 1087.0 1083.0 1096.0Year 3 963.0 1034.0 1075.0 1130.0 1218.0 1163.0 1113.0 1103.0 997.0 1001.0 1014.0Year 4 885.0 926.0 965.0 1020.0 1099.0 1044.0 1001.0 1001.0 904.0 909.0 933.0Year 5 806.0 827.0 852.0 918.0 990.0 947.0 895.0 892.0 805.0 831.0 854.0Thereafter 5897.0 6018.0 6248.0 6844.0 7632.0 7335.0 6921.0 6754.0 6912.0 7297.0 7090.0Total Minimum Payments 10717.0 11121.0 11554.0 12523.0 13713.0 13160.0 12515.0 12253.0 11857.0 12266.0 12134.0Less: Cumulative Interest 1291.4 1324.4 1378.1 1508.1 1684.7 1619.8 1531.7 1489.9 1545.2 1630.3 1569.6PV of Minimum Payments 9425.6 9796.6 10175.9 11014.9 12028.3 11540.2 10983.3 10763.1 10311.8 10635.7 10564.4

Implied Interest in Year 1 Payment 197.9 205.7 213.7 231.3 252.6 242.3 230.6 226.0 216.5 223.3

Pre-Tax Cost of Debt 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10% 2.10%Years Implied by Year 6 Payment 7.3 7.3 7.3 7.5 7.7 7.7 7.7 7.6 8.6 8.8 8.3Expected Obligation in Year 6 & Beyond 806 827 852 918 990 947 895 892 805 831 854

Present Value of Lease PaymentsPV of Year 1 1096.0 1175.3 1221.4 1324.2 1410.4 1353.6 1322.2 1276.2 1128.3 1121.4 1123.4PV of Year 2 1004.4 1070.6 1119.5 1207.7 1279.7 1236.5 1184.7 1151.1 1042.7 1038.9 1051.4PV of Year 3 904.8 971.5 1010.0 1061.7 1144.4 1092.7 1045.7 1036.3 936.7 940.5 952.7PV of Year 4 814.4 852.1 888.0 938.6 1011.3 960.7 921.2 921.2 831.9 836.5 858.6PV of Year 5 726.5 745.4 767.9 827.4 892.3 853.5 806.7 804.0 725.5 749.0 769.7PV of 6 & beyond 4879.6 4981.7 5169.1 5655.2 6290.2 6043.2 5702.8 5574.3 5646.5 5949.4 5808.6Capitalized PV of Payments 9425.6 9796.6 10175.9 11014.9 12028.3 11540.2 10983.3 10763.1 10311.8 10635.7 10564.4

McDonalds CorpValuation of Options Granted under ESOP

Current Stock Price $178.43Risk Free Rate 0.66%Current Dividend Yield 2.52%Annualized St. Dev. of Stock Returns 20.84%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 14.6 124.21$ 5.90 47.69$ 696$ Total 15 124.21$ 5.90 66.77$ 696.27$

McDonalds CorpEffects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 15Average Time to Maturity (years): 5.90Expected Annual Number of Options Exercised: 2

Current Average Strike Price: 124.21$ Cost of Equity: 6.08%Current Stock Price: $178.43

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024EIncrease in Shares Outstanding: 2 2 2 2 2Average Strike Price: 124.21$ 124.21$ 124.21$ 124.21$ 124.21$ Increase in Common Stock Account: 307 307 307 307 307

Change in Treasury Stock -2,500 -2,500 -2,500 -2,500 -2,500Expected Price of Repurchased Shares: 178.43$ 189.27$ 200.78$ 212.98$ 225.93$ Number of Shares Repurchased: (14) (13) (12) (12) (11)

Shares Outstanding (beginning of the year) 746 735 724 714 705Plus: Shares Issued Through ESOP 2 2 2 2 2Less: Shares Repurchased in Treasury (14) (13) (12) (12) (11) Shares Outstanding (end of the year) 735 724 714 705 696