McDonald’s Corporation

Financial Analysis

By Brenda Hudson, John Doeand Mary Smith

BUS307 Research Project

McDonald’s Business Overview

• Largest fast food restaurant operator

• Serves 47 + million people daily

• 31,xxx restaurants in 121 countries– 23,xxx are company-owned– 7,8xx are franchised or affiliated

• System-wide sales of $33 + billion

McDonald’s Income Statement

• 2003 Revenues of $17.14 billion– 11.3% increase of which 5% was true

revenue growth– Company-owned store revenue

• $12,795.4 million• 74.7% of total

– Franchises/affiliates revenue• $4,345.1 million• 25.3% of total

McDonald’s Income Statement

• Net Income went up 65.7%– Revenues up by 11.3%– Operating Costs and Expenses up by only 7.6%

• Total Op. Costs and Exp. – 83.5% of Revenue

• Most expenses increased by 10-12.7%

• SG&A increased by only 7%

• Net Income beats industry– McDonalds Profit Margin = 8.6%– Industry Profit Margin = 7.24%– Wendy’s Profit Margin = 7.5%

McDonald’s Balance Sheet

• 2003 Total Assets of $25.525 billion up by 6.5%– Current Assets up 9.9% led by:

• Cash up 49.2%• Prepaid Expenses & Other Current Assets up

by 26.5%• Accounts & Notes Receivable down by 14.1%

– Largest Current Asset

– McDonald’s Current Assets are 7.4% of Total Assets vs. Wendy’s (14.6%)

McDonald’s Balance Sheet

• 2003 Total Assets of $25.525 billion up by 6.5%– Net Property and Equipment

• Largest Asset, Fixed Asset

• 78.1% of assets (compare to Wendy’s (68.1%))

• Increased 7.2%

– Long-term Debt• Largest Liability

• 36.6% of assets (compare to Wendy’s (21.9%))

• Decreased by 3.7%

McDonald’s Ratio AnalysisCurrent Ratio

– McDonald’s: 0.76 vs. Industry: 0.945 vs. Wendy’s 0.87

Quick Ratio– McDonald’s: 0.71 vs. Industry: 0.572 vs.

Wendy’s 0.56High Inventory Turns – Better than comparables

– McDonald’s: 132.5x vs. Industry: 41.0x vs. Wendy’s 39.05x

Days Sales Outstanding:– 15.4 days down 4.6 days from 2002– Receivables Turns – Lower than comparables

• McDonald’s 23.3 x/yr Vs. Industry: 36.8x/yr vs. Wendy’s 29.83x/yr

McDonald’s Ratio AnalysisLower Total Asset Turns:

– McDonald’s: 0.67 vs. Industry: 1.25 vs. Wendy’s 1.11

Higher Debt Ratio:– McDonald’s: 53.1% vs. Industry: 38.35% vs.

Wendy’s 29.58%Higher Profit Margin:

– McDonald’s: 8.6% vs. Industry: 7.24% vs. Wendy’s 7.5%

BEP, ROA, ROE trending up, but well below industry and competition

Price/Earnings is lower than industry, higher than Wendy’s– McDonald’s: 21.59 vs. Industry: 27.73 vs.

Wendy’s: 20.65

McDonald’s Beta, Required Return & Stock Price

• McDonald’s beta = 0.73– Wendy’s beta = 0.363, Yum! Brands =

0.426, Restaurant Industry Beta = 0.57– Cross-Industry Market Norm = 1– McDonald’s σ of 10 years past returns =

40.1%

McDonald’s Beta, Required Return & Stock Price

• McDonald’s Required Rate of Return– Security Market Line (SML) – 11.2%– Capital Market Line (CML) – 18.9%– Average Required Return= 15.05%

• Sources: – KRf = 5.7% (long-term government bond yield)

– KM = 12.7% (Long term yield on Large Stocks (1926-2001))

– Market σ of 10 years past returns = 21.05%– McDonald’s σ of 10 years past returns = 40.1%

McDonald’s Beta, Required Return & Stock Price

• McDonald’s Target Stock Price– Four Methods:

• Price Earnings – Average = $44.37• Market Book – Average = $32.9• Gordon Dividend Growth Model = $7.46• Ben Graham Model – $24.24

– Average Target Price is $32.20.– Excluded Gordon Dividend Cost

McDonald’s Debt • Current Liabilities up by 2.6%• $9.7 billion in Long-term debt

(including current maturities)

– 3% decrease from 2002– 16 bonds maturing from 2004 to 2033 at

coupon rates of 4.15% to 8.875%– Weighted Average Interest Rate on total

debt = 4.1%– Long Term Debt Ratings:

• Moody’s: A2, S&P: A, Fitch A

– Interest Expense up by 3.7% to 388 million

McDonald’s Stock & Dividend History

• Public since 1966• Market Cap = $36.6 billion• Modest dividend strategy

– Current dividend is 40¢ / year– Dividend increased 70% in 2003– Increased 29 times since 1976

• Twelve Stock Splits• Average annual stock appreciation of 20.8%• Stock Repurchase of $439 million in 2003

(18.9 million shares)

McDonald’s Improvement StrategiesUndertaking “Revitalization” Strategy• Reduce Operational Expenses

– Reduce SG&A – dollars toward systems, menu expansion, training

• Asset Management and Utilization• Reduce net capital spending

– Close underperforming restaurants– Cautious expansion

• Increase same-restaurant sales

• Hedges are planned to combat weak foreign currencies • Strategies for PR and food safety in light of mad cow

disease in some areas• Tighten Quality Control within franchises• Expand Partner Brands – be own competitor• Cross-sell other products in restaurants

McDonald’s Summary &Our Recommendations

• McDonald’s is restaurant segment leader – 40% domestic quick-service restaurant market share

• Generates tremendous cash flow – (Over $2 billion in 2003)

• Growth possibilities– They are beyond high growth phase in US, but still

room for same-restaurant improvement and new restaurants in some US markets

– Continue to replicate US success internationally

• Fast food restaurant market segment in trouble, but McDonald’s is the leader in this segment.