Download - McDonald’s Corporation NYSE: MCD - washburn.edu · MCD has increased menu innovation by adding a premium coffee line, the McCafé , and by catering to consumers who prefer healthier

McDonald’s Corporation

NYSE: MCD

Student Investment Fund Stock Report

Recommendation: Long‐Term Buy Market Cap: $75.85 billion Current Price: $68.01

Sector: Consumer Discretionary Dividend Yield: 3.17% 12‐month target price: $87.73

Sub‐Sector: Fast Food Restaurant P/E Ratio: 15.82 Beta: 0.65

INVESTMENT THESIS

Concerns of a sluggish economy in 2010 led us to MCD – the Student Investment Fund favors large-cap, low beta, defensive stocks that pay above-average dividends.

MCD has superior financial stability and has provided shareholders with substantial return on investment —including a current dividend yield of 3.17%, the highest in their industry.

MCD vigorously grows its fundamental value drivers (Dividends, NOPAT and Free Cash Flow) year-over-year.

During the past 10 years of economic decline and uncertainty, MCD's stock price has appreciated 150%.

Consumer Discretionary is the top performing sector since the end of January, outperforming the S&P 500 by roughly 10%

HIGHLIGHTS MCD is a consistent value

creator, as shown by its ability to deliver year-over-year increasing NOPAT and FCF without growing its stock price above fundamentals.

MCD penetrated the coffee industry with the introduction of the McCafé in 2008. MCD’s lower cost, premium coffee competes with Starbucks and is projected to generate $1 billion in total net sales each year.

MCD has an established and expanding presence in high growth, emerging markets.

BUSINESS SUMMARY MCD is currently recognized as the world’s largest revenue-generating fast food restaurant, earning over $22 billion in sales during 2009. Compared to its major competitors, MCD leads the industry with 57% market share. Also in 2009, MCD earned almost 65% of its total sales in international markets. Operating 32,500 locations in 117 countries allows MCD to leverage brand equity with population growth to increase revenues worldwide.

10-YEAR RETURNS

Analysts: Heather Gelsinger, Dentin Chapman,

Brandon Holle, David Packard


NYSE: MCD

Macroeconomic Thesis

Plan to Win

Consumer spending remains weak, unemployment is

hovering around 10%, and real disposable income is

decreasing. MCD excels under these conditions by

providing high value at a low cost to consumers. In

addition, the company's Plan to Win initiatives have

positioned it for further increases in market share when

the economy improves. MCD is deploying a multi‐billion

dollar reimaging budget featuring menu innovations,

space redesign and service enhancements to further

upgrade its exemplary global brand.

This year, MCD plans to spend $1.2 billion solely on reimaging. Moreover, MCD plans to

reimage over 85% of its locations by the end of 2011.

MCD has increased menu innovation by adding a premium coffee line, the McCafé , and by

catering to consumers who prefer healthier options such as salads, yogurt parfaits and

chicken products.

MCD has increased service enhancement by offering free WiFi, offering food delivery at

certain locations, and staying open 24 hours a day in others.

These initiatives have already contributed to year‐over‐year revenue growth of 10.5% and

global same‐store sales growth of 4.2%, and are expected to fuel above‐average growth for a

considerable period of time.

International Exposure

MCD has diversified its locations by operating over 32,500 restaurants in 117 countries, which

decreases the company’s exposure to the intensely competitive fast food industry in the United

States. Also, MCD serves an average of 60 million consumers each day. This per‐day figure has

increased by $14 million (30%) since 2001 and $2 million over the past year.


NYSE: MCD

MCD currently divides its revenues into four

segments: the United States, Europe, the APMEA

(Asia, Pacific, Middle East, and Africa segment),

and other countries (i.e. Canada and Latin America

and corporate sales). Almost 65% of MCD sales are

derived internationally. MCD focuses both on

penetrating emerging markets and expanding in

developed markets.

The graph to the right shows MCD’s

established presence in both developed

and fast growing emerging markets along

with the population growth rates..

The blue shaded zones represent MCD's

concerted effort to enter emerging

markets, where population is growing

faster relative to developed markets.

MCD expects to build 1,000 restaurants

among all of its regional segments during 2010. This strategic move will increase revenue by

approximately 2%.

We view MCD's efforts to exploit opportunities in these particular markets as a strong positive

catalyst, as these areas provide the largest international growth opportunities. Additionally,

when an emerging market begins to industrialize, consumers begin to mirror Westerners: they

want to purchase Western‐style products in general, and specifically consume more animal

protein. These demographics will benefit MCD and its shareholders as it continues to expand

its international presence.

2009 Sales By Segment


NYSE: MCD

Industry Presence

Invading Starbucks Territory MCD introduced the McCafé in 2008 and increased

its premium coffee product line to include frappes,

iced coffees, mochas, and lattes in 2009. Offering

premium coffee products for an average of $2

cheaper is advantageous for MCD — they can

more easily serve a price sensitive consumer who

is focused on value.

Additionally, Starbucks currently operates in only

50 countries, compared to MCD's operations in

117 countries. Not only does MCD have an advantage over Starbucks through its appeal to

price sensitive consumers, but Starbucks does not compete with MCD in 67 countries.

Superior Market Share

The fast food industry generated about $160

billion dollars in revenue in 2009. When

comparing MCD to its main fast food

competitors YUM, WEN and BKC, MCD holds a

dominant 57% market share.

2009 Market Share


NYSE: MCD

Revenue (millions) Profit Margin Dividend Yield ROIC

MCD $22,745 20% 3.2% 22%

BKC $2,537 8% 1.2% 28%

YUM $10,836 10% 2.0% 33%

WEN $3,581 0% 1.2% ‐1%

SBUX $9,775 4% 0.0% 12%

Within the fast food industry, MCD has the highest revenue, more than doubling the total of its

closest competitor (YUM). In addition, MCD’s lean cost structure allows for the highest profit

margin in the industry. This profit margin allows the company to return more value to its

shareholders through dividends, producing the highest dividend yield in the industry and a

competitive ROIC. Because MCD has a much larger capital investment than its competitors,

earning 22% ROIC on that larger capital base allows them to earn higher economic profits than

competitors with higher ROIC but much lower capital investments.


NYSE: MCD

Model Assumptions Our valuation analysis for MCD was conducted using conservative modeling assumptions. Our

discounted cash flow model estimates MCD’s intrinsic value at $87.73 per share for 2010,

indicating MCD is currently undervalued, even in light of these conservative expectations for its

future revenue growth and cost structure.

Income Statement Inputs

Revenue Growth: Despite having a solid five‐year historical growth rate of 4.4%, MCD faced revenue growth of ‐3.3% during 2009. In 2009, MCD saw the adverse affects of a weak consumer spending environment, which was exacerbated by lower disposable income during the recession.

o Historical Revenue Growth

o Forecasted Revenue Growth

Cost of Goods Sold: MCD’s historical average COGS/Sales expense was 64.9%. For our forecast, we decreased COGS/Sales to 61.0%, which was more in line with 2008 and 2009 COGS/Sales of 63.3% and 61.3% respectively.

Selling, General & Administrative Expenses: MCD’s historical average SG&A/Sales expense was 10.5%. For our forecast, we decreased SG&A/Sales to 10.0%, which was more in line with 2008 and 2009 SG&A/Sales of 10.0% and 9.8% respectively.

Share Growth: In September 2007, MCD announced its plan for a $10 billion share repurchasing program with no specific expiration date. Therefore, we continued MCD’s share growth at −3.0% throughout our forecast which was in line with MCD’s five‐year historical average share growth of −3.5%.

Diluted Share Growth: As with share growth, we decreased MCD’s diluted share growth at the same rate of −3.0% which was in line with MCD’s five year historical growth rate of −3.4%.

Dividend Growth: MCD has a forecasted dividend yield of 3.17%. Our valuation model grows the dividend payments appropriately to maintain a 3.17% dividend yield throughout the forecast period.


NYSE: MCD

Balance Sheet Inputs:

Cash: MCD’s five‐year historical average Cash/Sales of 11.6% has been on a downtrend over the past three years. In 2007, 2008 and 2009 MCD had Cash/Sales of 8.7%, 8.8%, and 7.9% respectively. Our forecast repeats the current trend with forecasted Cash/Sales of 8.5%.

Weighted Average Cost of Capital Assumptions: A WACC of 7.1% was calculated using

Short‐term debt cost of 1.58%

Long‐term debt cost of 6.10%

Cost of Equity: Cost of Equity of 7.50% was calculated using the following inputs o Risk‐free rate of 4.25% o Market risk premium of 5.00% o Beta of 0.65: Conducting a regression analysis of MCD’s historical returns

compared to the market since 2005 yielded a beta of 0.53. To maintain conservatism in our model and allow for reversion to the mean, we increased the beta estimate to 0.65.

Long‐term Horizon Value Growth Rate

We applied a long‐term horizon growth rate of 3% for MCD to maintain a conservative outlook

for the company’s long‐term prospects. A long‐term horizon growth rate of 3% fits with the

outlook for US GDP growth.


NYSE: MCD

Financial Analysis In the pursuit of a lean cost structure, MCD has franchised 80% of its restaurants (the remaining

20% are operated by the MCD Corporation). This is illustrated through high profitability, strong

value creation, and a wide ROIC‐to‐WACC spread.

ROA and ROE

Historical Average

Forecasted Average

ROA 11.3% 13.1%

ROE 23.1% 23.8%

MCD maintains stable level of returns on assets and equity throughout the forecast. The forecasted ROA average is below the 2008 and 2009 ROA values of 15.2% and 15.1% respectively. The forecasted ROE is well below MCD’s 2008 and 2009 return on equity of 32.2% and 32.4% respectively. The reason for the forecasted downtrend in ROE is that the company generates excessive amounts of cash and uses it to pay down long term debt in the forecast. This decreases the equity multiplier throughout the duration of the forecast

EPS and DPS growth

Historical Average

Forecasted Average

EPS 15.27% 7.38%

DPS 25.07% 6.31%

MCD has paid a dividend for 34 consecutive years, increasing it every year to its current value of $0.55 per quarter ($2.20/yr). Even when compressed to lower rates for the forecast, MCD manages to grow both earnings per share and dividends per share at sustainable levels through 2019.


NYSE: MCD

Value Creation Metrics

NOPAT and Free Cash Flow (millions)

Historical Average

Forecasted Average

NOPAT $3,542 $5,460

FCF $3,920

$4,309

Over the past five years, MCD has generated large positive free cash flow. Our forecast has MCD’s free cash flow growing at an average annual growth rate of 4.25%. Historically, MCD has grown its NOPAT at an average rate of 11.33%. Following a slight reduction in NOPAT in 2010, we forecast NOPAT to grow at an average yearly growth rate of 3.94%.

Economic Value Added In 2009, MCD’s EVA was $3.24. Our forecast tightens EVA to $2.80 billion and $2.91 billion in 2010 and 2011, respectively. This decrease is due to our conservative modeling assumptions.

Market Value Added In 2009, MCD’s MVA was $76.84 billion. For 2010, this metric grew to $79.16 billion. MCD’s MVA is projected to continue its growth at a yearly rate of 2.8% through 2019.


NYSE: MCD

Value Spread: ROIC to WACC

ROIC Historical average return on invested capital was 16.4% for MCD. In 2009, MCD generated their highest return on capital at 21.8%. For the forecast, ROIC was squeezed to an average 19.4% through 2019.

WACC Weighted‐average cost of capital was calculated at 7.1%. As described above, the risk‐free rate, beta, and market risk premium were increased to maintain conservatism.

Value Spread (ROIC to WACC) MCD’s historical average value spread was 9.3%. In 2009, MCD value spread was at its peak of 14.7%. MCD forecasted value spread averages 12.3%. Even with a conservative valuation model, MCD displays considerable potential to further increase its value creation beyond our forecasted ROIC‐WACC spread measure.


NYSE: MCD

Financial Stability

Altman Z‐Score Test for Bankruptcy Historically, MCD scored an average of 5.20, which is well above the safe zone. MCD also scored in the same zone for the forecast with an average Altman Z‐Score of 6.77.

Piotroski’s Financial Fitness Scorecard Historically, MCD scored an average of 9 out of 11. MCD’s average score for the forecasted years was also 9 out of 11, which suggests continued financial stability through 2019.

Other Analyst Recommendations

Both Argus and Ned Davis recommend MCD as a “Long‐Term Buy” while Standard and Poor’s recommends a hold with a three‐star rating (out of five).

Argus Long‐term Buy

Ned Davis Long‐term Buy

Standard and Poor’s 3‐star rating


NYSE: MCD

Recommendation Summary

Due to MCD’s strong dividend, stable balance sheet, and consistent ability to create

shareholder value, we rate MCD as an attractive buy and hold stock for the Student Investment

Fund.

The purchase of MCD stock would ensure a 3.17% dividend yield for the Student Investment Fund.

MCD is in the process of implementing its Plan to Win, which will focus on upgrading the current brand through reimaging, menu innovation, and service enhancement. MCD has plans to reimage 2,000 locations, 1,000 in Europe, 600 in APMEA and 400 in the U.S. in 2010. MCD also has plans to open more than 1,000 new restaurants in 2010, adding almost 2% to top line revenue.

MCD offers a low correlation coefficient to the stocks held in the fund. Excluding the VTI, MCD does not have a correlation coefficient over .49 with any stock held in the fund.

MCD stock has returned over 150% to shareholders in the past 10 years. With a continued ability to grow their net operating profit after tax and free cash flow on a year‐by‐year basis, MCD market price has never been able to catch up to the intrinsic value of the firm.

Our forecast represents MCD performance in a less than ideal environment. MCD should meet and likely surpass our conservative modeling assumptions making our discounted cash flow price a conservative estimate.

MCD Financial Analysis, Page 1 of 8

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383940414243444546474849505152535455565758

A B C D E F G H I J K L M N

Enter Firm Ticker MCD

Enter first financial statement year in cell B6 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average ManualTotal revenue 19,117 20,895 22,787 23,522 22,745 Revenue Growth 9.3% 9.1% 3.2% -3.3% 4.4%

Cost of goods sold 12,940 13,963 14,881 14,883 13,953 COGS % of Sales 67.7% 66.8% 65.3% 63.3% 61.3% 64.9% 61.0%

Gross profit 6,177 6,932 7,905 8,639 8,792SG&A expense 2,118 2,296 2,367 2,356 2,234 SG&A % of Sales 11.1% 11.0% 10.4% 10.0% 9.8% 10.5% 10.0%

Research & Development 0 0 0 0 0 R&D % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Depreciation/Amortization 0 0 0 0 0 D&A % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Interest expense (income), operating 0 0 0 0 0 Inc. Exp. Oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Non-recurring expenses 128 280 1,775 (49) (116) Exp. Non-rec 0.7% 1.3% 7.8% -0.2% -0.5% 1.8%

Other operating expenses 0 0 0 0 0 Other exp. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Operating Income 3,984 4,433 3,879 6,443 6,841Interest income (expense), non-operating 0 0 0 0 0 Int. inc. non-oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Gain (loss) on sale of assets 0 0 0 0 0 Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Other income, net 32 (29) (20) (12) (27) Other income, net 0.2% -0.1% -0.1% -0.1% -0.1% 0.0%

Income before tax 3,660 4,154 3,572 6,158 6,487Income tax 1,082 1,288 1,237 1,845 1,936 Tax rate 29.6% 31.0% 34.6% 30.0% 29.8% 31.0%

Income after tax 2,578 2,866 2,335 4,313 4,551Minority interest 0 0 0 0 0 Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Equity in affiliates 0 0 0 0 0 Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

U.S. GAAP adjustment 0 0 0 0 0 U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Net income before extraordinary items 2,578 2,866 2,335 4,313 4,551Extraordinary items, total 25 678 60 0 0 Extrordinary items

Net income 2,602 3,544 2,395 4,313 4,551Total adjustments to net income 0 0 0 0 0 Adjustments to NI

Basic weighted average shares 1,260 1,234 1,188 1,127 1,092 Share growth -2.1% -3.7% -5.2% -3.1% -3.5% -3.0%

Basic EPS excluding extraordinary items 2.05 2.32 1.96 3.83 4.17Basic EPS including extraordinary items 2.06 2.87 2.02 3.83 4.17Diluted weighted average shares 1,274 1,252 1,212 1,146 1,107 Diluted share growth -1.8% -3.2% -5.4% -3.4% -3.4% -3.0%

Diluted EPS excluding extraordinary items 2.02 2.29 1.93 3.76 4.11Diluted EPS including extraordinary items 2.04 2.83 1.98 3.76 4.11Dividends per share -- common stock 0.67 1.00 1.50 1.63 2.05Gross dividends -- common stock 842 1,217 1,766 1,823 2,236 Dividend growth 44.5% 45.1% 3.3% 22.6% 27.6%

Retained earnings 1,760 2,328 630 2,490 2,316

Data Source: Thomson/Reuters

values in millions

Forecasting PercentagesHistorical Income Statements

Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.


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O P Q R S T U V W X Y Z

Dividend Growth (Yield set @ 3.17%) 31.45% 3.29% 5.52% 2.51% 5.52% 3.02% 2.06% 3.29% 5.58% 3.59%

Year-by-year revenue growth 3.50% 4.00% 4.50% 6.00% 5.00% 5.00% 4.50% 4.00% 3.50% 3.00%

year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019ETotal revenue 23,541 24,482 25,584 27,119 28,475 29,899 31,244 32,494 33,631 34,640

Cost of goods sold 14,360 14,934 15,606 16,543 17,370 18,238 19,059 19,821 20,515 21,131

Gross profit 9,181 9,548 9,978 10,576 11,105 11,661 12,185 12,673 13,116 13,510SG&A expense 2,354 2,448 2,558 2,712 2,848 2,990 3,124 3,249 3,363 3,464

Research & Development 0 0 0 0 0 0 0 0 0 0

Depreciation/Amortization 0 0 0 0 0 0 0 0 0 0

Interest expense (income), operating 0 0 0 0 0 0 0 0 0 0

Non-recurring expenses 428 445 465 493 517 543 568 590 611 629

Other operating expenses 0 0 0 0 0 0 0 0 0 0

Operating Income 6,399 6,655 6,955 7,372 7,741 8,128 8,493 8,833 9,142 9,416Interest income (expense), non-operating (614) (607) (607) (624) (625) (620) (598) (562) (516) (456)

Gain (loss) on sale of assets 0 0 0 0 0 0 0 0 0 0

Other income, net (11) (11) (11) (12) (13) (13) (14) (15) (15) (15)

Income before tax 5,774 6,037 6,336 6,736 7,103 7,494 7,881 8,257 8,611 8,945Income tax 1,790 1,872 1,964 2,088 2,202 2,323 2,443 2,560 2,670 2,773

Income after tax 3,984 4,166 4,372 4,647 4,901 5,171 5,438 5,697 5,942 6,172Minority interest 0 0 0 0 0 0 0 0 0 0

Equity in affiliates 0 0 0 0 0 0 0 0 0 0

U.S. GAAP adjustment 0 0 0 0 0 0 0 0 0 0

Net income before extraordinary items 3,984 4,166 4,372 4,647 4,901 5,171 5,438 5,697 5,942 6,172Extraordinary items, total 0 0 0 0 0 0 0 0 0 0

Net income 3,984 4,166 4,372 4,647 4,901 5,171 5,438 5,697 5,942 6,172Total adjustments to net income 0 0 0 0 0 0 0 0 0 0

Basic weighted average shares 1,059 1,028 997 967 938 910 882 856 830 805

Basic EPS excluding extraordinary items 3.76 4.05 4.39 4.81 5.23 5.68 6.16 6.66 7.16 7.66Basic EPS including extraordinary items 3.76 4.05 4.39 4.81 5.23 5.68 6.16 6.66 7.16 7.66Diluted weighted average shares 1,074 1,042 1,011 980 951 922 895 868 842 817

Diluted EPS excluding extraordinary items 3.71 4.00 4.33 4.74 5.15 5.61 6.08 6.56 7.06 7.56Diluted EPS including extraordinary items 3.71 4.00 4.33 4.74 5.15 5.61 6.08 6.56 7.06 7.56Dividends per share -- common stock 2.77 2.95 3.21 3.40 3.69 3.92 4.13 4.40 4.78 5.11Gross dividends -- common stock 2,939 3,035 3,203 3,283 3,464 3,569 3,643 3,763 3,973 4,115

Retained earnings 1,045 1,130 1,169 1,364 1,436 1,602 1,795 1,934 1,969 2,057

Forecasted Income Statements -- 10 Years


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AA AB AC AD AE AF AG AH AI AJ AK AL AM AN

Enter Firm Ticker MCD

year 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average ManualAssets

Cash & equivalents 4,261 2,128 1,981 2,063 1,796 Cash % of Sales 22.3% 10.2% 8.7% 8.8% 7.9% 11.6% 8.5%

Short term investments 0 0 0 0 0 ST Invest. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Receivables, total 794 806 1,054 931 1,060 Receivables % Sales 4.2% 3.9% 4.6% 4.0% 4.7% 4.3%

Inventory, total 144 112 125 112 106 Inventory % of Sales 0.8% 0.5% 0.5% 0.5% 0.5% 0.6%

Prepaid expenses 640 319 422 412 454 Pre. Exp. % of Sales 3.3% 1.5% 1.8% 1.7% 2.0% 2.1%

Other current assets, total 380 1,826 0 0 0 Other CA % of Sales 2.0% 8.7% 0.0% 0.0% 0.0% 2.1%

Total Current Assets 6,219 5,192 3,582 3,518 3,416Property, plant and equipment (net) 19,573 19,438 20,985 20,255 21,532 Net PPE % of Sales 102.4% 93.0% 92.1% 86.1% 94.7% 93.7%

Goodwill 1,924 2,074 2,301 2,237 2,425 Goodwill % of Sales 10.1% 9.9% 10.1% 9.5% 10.7% 10.1%

Intangibles 0 0 0 0 0 Intangibles % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Long term investments 1,035 1,035 1,156 1,222 1,213 LT Invest. % of Sales 5.4% 5.0% 5.1% 5.2% 5.3% 5.2%

Notes receivable -- long term 0 0 0 0 0 Notes Rec. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Other long term assets, total 1,237 1,235 1,367 1,230 1,639 Other LT ass. % Sales 6.5% 5.9% 6.0% 5.2% 7.2% 6.2%

Other assets, total 0 0 0 0 0 Other assets % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total assets 29,989 28,975 29,392 28,462 30,225Liabilities and Shareholders' Equity

Accounts payable 678 669 624 620 636 Acc. Payable % Sales 3.5% 3.2% 2.7% 2.6% 2.8% 3.0%

Payable/accrued 0 0 0 0 0 Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Accrued expenses 1,317 1,460 1,635 1,633 1,855 Acc. Exp. % of Sales 6.9% 7.0% 7.2% 6.9% 8.2% 7.2%

Notes payable/short term debt 544 0 1,127 0 0 Notes payable % Sales 2.8% 0.0% 4.9% 0.0% 0.0% 1.6%

Current portion of LT debt/Capital leases 659 18 865 32 18 Curr. debt % of Sales 3.4% 0.1% 3.8% 0.1% 0.1% 1.5%

Other current liabilities 911 806 248 253 480 Other curr liab % Sales 4.8% 3.9% 1.1% 1.1% 2.1% 2.6%

Total Current Liabilities 4,108 2,952 4,499 2,538 2,989Long term debt, total 8,934 8,390 7,310 10,186 10,560 LT debt % of Sales

Deferred income tax 949 1,076 961 945 1,279 Def. inc. tax % Sales 5.0% 5.2% 4.2% 4.0% 5.6% 4.8%

Minority interest 0 0 0 0 0 Min. Int. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Other liabilities, total 852 1,098 1,343 1,410 1,363 Other liab. % of Sales 4.5% 5.3% 5.9% 6.0% 6.0% 5.5%

Total Liabilities 14,843 13,516 14,112 15,079 16,191Preferred stock (redeemable)

Preferred stock (unredeemable) 0 0 0 0 0

Common stock 17 17 17 17 17Additonal paid-in capital 2,720 3,445 4,227 4,600 4,854Retained earnings (accumluated deficit) 23,516 25,846 26,462 28,954 31,271Treasury stock -- common (10,374) (13,552) (16,762) (20,289) (22,855)ESOP Debt Guarantee 0 0 (38) (98) (135)Other equity, total (733) (297) 1,375 199 882

Total Shareholders' Equity 15,146 15,458 15,280 13,383 14,034Total Liabilities and Shareholders' Equity 29,989 28,975 29,392 28,462 30,225Diluted weighted average shares 1,263 1,204 1,165 1,115 1,077 Diluted share growth -4.7% -3.2% -4.3% -3.5% -3.9%Total preferred shares outstanding 0 0 0 0 0 Preferred share growth

Forecasting Percentagesvalues in millions

Historical Balance Sheets

Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.

The model uses the more conservative diluted common shares number for total shares outstanding.


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AO AP AQ AR AS AT AU AV AW AX AY AZ

year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019EAssets

Cash & equivalents 2,001 2,081 2,175 2,305 2,420 2,541 2,656 2,762 2,859 2,944

Short term investments 0 0 0 0 0 0 0 0 0 0

Receivables, total 1,001 1,041 1,088 1,153 1,211 1,271 1,328 1,381 1,430 1,473

Inventory, total 131 136 142 151 159 166 174 181 187 193

Prepaid expenses 493 513 536 568 596 626 654 680 704 725

Other current assets, total 505 525 549 582 611 641 670 697 722 743

Total Current Assets 4,131 4,296 4,489 4,759 4,996 5,246 5,482 5,702 5,901 6,078Property, plant and equipment (net) 22,047 22,929 23,961 25,399 26,668 28,002 29,262 30,432 31,498 32,443

Goodwill 2,367 2,461 2,572 2,726 2,863 3,006 3,141 3,267 3,381 3,482

Intangibles 0 0 0 0 0 0 0 0 0 0

Long term investments 1,223 1,272 1,329 1,409 1,479 1,553 1,623 1,688 1,747 1,800

Notes receivable -- long term 0 0 0 0 0 0 0 0 0 0

Other long term assets, total 1,451 1,509 1,577 1,671 1,755 1,843 1,926 2,003 2,073 2,135

Other assets, total 0 0 0 0 0 0 0 0 0 0

Total assets 31,218 32,467 33,928 35,964 37,762 39,650 41,434 43,091 44,600 45,938Liabilities and Shareholders' Equity

Accounts payable 702 731 763 809 850 892 932 970 1,004 1,034

Payable/accrued 0 0 0 0 0 0 0 0 0 0

Accrued expenses 1,702 1,770 1,850 1,960 2,058 2,161 2,259 2,349 2,431 2,504

Notes payable/short term debt 367 381 399 423 444 466 487 506 524 540

Current portion of LT debt/Capital leases 355 369 386 409 429 451 471 490 507 522

Other current liabilities 607 631 660 699 734 771 806 838 867 893

Total Current Liabilities 3,733 3,882 4,057 4,300 4,515 4,741 4,954 5,153 5,333 5,493Long term debt, total 9,978 9,850 9,854 10,124 10,131 10,044 9,682 9,077 8,319 7,336

Deferred income tax 1,129 1,174 1,227 1,300 1,365 1,434 1,498 1,558 1,612 1,661

Minority interest 0 0 0 0 0 0 0 0 0 0

Other liabilities, total 1,299 1,351 1,412 1,496 1,571 1,650 1,724 1,793 1,856 1,911

Total Liabilities 16,139 16,257 16,549 17,221 17,582 17,869 17,858 17,581 17,120 16,401Preferred stock (redeemable) 0 0 0 0 0 0 0 0 0 0

Preferred stock (unredeemable) 0 0 0 0 0 0 0 0 0 0

Common stock 17 17 17 17 17 17 17 17 17 17Additonal paid-in capital 4,854 4,854 4,854 4,854 4,854 4,854 4,854 4,854 4,854 4,854Retained earnings (accumluated deficit) 32,316 33,447 34,616 35,980 37,416 39,018 40,813 42,747 44,716 46,773Treasury stock -- common (22,855) (22,855) (22,855) (22,855) (22,855) (22,855) (22,855) (22,855) (22,855) (22,855)ESOP Debt Guarantee (135) (135) (135) (135) (135) (135) (135) (135) (135) (135)Other equity, total 882 882 882 882 882 882 882 882 882 882

Total Shareholders' Equity 15,079 16,210 17,379 18,743 20,179 21,781 23,576 25,510 27,480 29,536Total Liabilities and Shareholders' Equity 31,218 32,467 33,928 35,964 37,762 39,650 41,434 43,091 44,600 45,938Total common shares (diluted) 1,035 994 955 918 882 847 814 782 752 722Total preferred shares outstandingAFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Adjustment to LT Debt (iterate or use Goal Seek (582.0) (128.1) 3.9 269.7 6.9 (86.2) (362.9) (604.2) (758.5) (982.7)Issue Common Stock to Fund AFNSet Balance Sheet Cash Lower to Fund AFN

Forecasted Balance Sheets -- 10 Years

Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49


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BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BPEnter Firm Ticker MCD

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019ELiquidity

Current 1.51 1.76 0.80 1.39 1.14 1.11 1.11 1.11 1.11 1.11 1.11 1.11 1.11 1.11 1.11

Quick 1.48 1.72 0.77 1.34 1.11 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07

Net Working Capital to Total Assets 0.07 0.08 (0.03) 0.03 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Asset ManagementDays Sales Outstanding 15.16 14.08 16.88 14.45 17.02 15.52 15.52 15.52 15.52 15.52 15.52 15.52 15.52 15.52 15.52

Inventory Turnover 132.48 185.90 181.86 210.96 214.17 179.63 179.63 179.63 179.63 179.63 179.63 179.63 179.63 179.63 179.63

Fixed Assets Turnover 0.98 1.07 1.09 1.16 1.06 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07 1.07

Total Assets Turnover 0.64 0.72 0.78 0.83 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75

Debt ManagementLong-Term Debt to Equity 59.0% 54.3% 47.8% 76.1% 75.2% 66.2% 60.8% 56.7% 54.0% 50.2% 46.1% 41.1% 35.6% 30.3% 24.8%

Total Debt to Total Assets 31.6% 29.0% 28.7% 35.8% 34.9% 33.1% 31.5% 30.2% 29.3% 28.0% 26.5% 24.5% 22.2% 19.8% 17.1%

Times Interest Earned N/A N/A N/A N/A N/A 10.4 11.0 11.4 11.8 12.4 13.1 14.2 15.7 17.7 20.6

ProfitabilityGross Profit Margin 32.3% 33.2% 34.7% 36.7% 38.7% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0%

Operating Profit Margin 20.8% 21.2% 17.0% 27.4% 30.1% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2%

Net After-Tax Profit Margin 13.5% 13.7% 10.2% 18.3% 20.0% 16.9% 17.0% 17.1% 17.1% 17.2% 17.3% 17.4% 17.5% 17.7% 17.8%

Total Assets Turnover 0.64 0.72 0.78 0.83 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75

Return on Assets 8.6% 9.9% 7.9% 15.2% 15.1% 12.8% 12.8% 12.9% 12.9% 13.0% 13.0% 13.1% 13.2% 13.3% 13.4%

Equity Multiplier 1.98 1.87 1.92 2.13 2.15 2.07 2.00 1.95 1.92 1.87 1.82 1.76 1.69 1.62 1.56

Return on Equity 17.0% 18.5% 15.3% 32.2% 32.4% 26.4% 25.7% 25.2% 24.8% 24.3% 23.7% 23.1% 22.3% 21.6% 20.9%

EPS (using diluted shares, excluding extraordinary items 2.02 2.29 1.93 3.76 4.11 3.71 4.00 4.33 4.74 5.15 5.61 6.08 6.56 7.06 7.56

DPS (dividends per share) 0.66 0.97 1.46 1.59 2.02 2.77 2.95 3.21 3.40 3.69 3.92 4.13 4.40 4.78 5.11

Free Cash Flow per Share 4.38 0.83 4.62 3.52 3.39 3.53 3.69 3.67 4.24 4.59 5.09 5.63 6.19 6.76

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019ENOPAT (net operating profit after tax) 2,806 3,058 2,536 4,513 4,799 4,415 4,592 4,799 5,086 5,341 5,608 5,860 6,095 6,308 6,497

ROIC (return on invested capital) 12.3% 15.0% 11.6% 21.4% 21.8% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4%

EVA (economic value added) 1,189 1,613 982 3,015 3,238 2,799 2,911 3,042 3,224 3,385 3,555 3,715 3,863 3,998 4,118

FCF (free cash flow) N/A 5,480 1,006 5,291 3,903 3,643 3,681 3,733 3,601 4,029 4,230 4,558 4,885 5,208 5,521

Weighted Average Cost of Capital 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%

Net Operating Working Capital (NOWC) 3,204 918 901 853 472 729 758 792 839 881 925 967 1,006 1,041 1,072

Operating Long Term Assets 19,573 19,438 20,985 20,255 21,532 22,047 22,929 23,961 25,399 26,668 28,002 29,262 30,432 31,498 32,443Total Operating Capital 22,778 20,356 21,886 21,107 22,003 22,776 23,687 24,753 26,238 27,550 28,927 30,229 31,438 32,538 33,515

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019ELong-term Horizon Value Growth Rate (user-supplied) 3.00%PV of Forecasted FCF, discounted at 7.10% $88,661 $89,475 $94,819 $96,258 $99,187 $102,584 $106,185 $109,989 $114,194 $118,271 $122,435 $126,566 $130,664 $134,731 $138,773Value of Non-Operating Assets $4,261 $2,128 $1,981 $2,063 $1,796 $2,001 $2,081 $2,175 $2,305 $2,420 $2,541 $2,656 $2,762 $2,859 $2,944Total Intrinsic Value of the Firm $92,922 $91,603 $96,801 $98,322 $100,983 $104,585 $108,266 $112,163 $116,499 $120,691 $124,976 $129,222 $133,426 $137,590 $141,718Intrinsic Market Value of the Equity $83,444 $83,213 $88,364 $88,136 $90,423 $94,240 $98,034 $101,911 $105,953 $110,117 $114,466 $119,054 $123,843 $128,747 $133,842Per Share Intrinsic Value of the Firm $65.49 $66.48 $72.92 $76.91 $81.65 $87.73 $94.09 $100.83 $108.07 $115.80 $124.09 $133.06 $142.69 $152.93 $163.90MVA (market value added) $68,298 $67,755 $73,084 $74,753 $76,389 $79,161 $81,824 $84,532 $87,210 $89,937 $92,685 $95,478 $98,332 $101,267 $104,305

Item Value Percent Cost Weighted Cost Risk Free Rate 4.25%ST Debt (from most recent balance sheet) 0 0.00% 1.58% 0.00% Beta 0.65LT Debt (from most recent balance sheet) 10,560 12.22% 6.10% 0.51% Market Risk Prem. 5.00%MV Equity (look up stock's mkt. cap and enter in cell BB53 75,845 87.78% 7.50% 6.58% Cost of Equity 7.50%Weighted Average Cost of Capital 7.10%

NOPAT per Share 2.20 2.44 2.09 3.94 4.33 4.11 4.41 4.75 5.19 5.62 6.08 6.55 7.02 7.49 7.96 EVA per Share 0.93 1.29 0.81 2.63 2.92 2.61 2.79 3.01 3.29 3.56 3.85 4.15 4.45 4.75 5.04 MVA per Share 68.98 73.69 78.53 83.64 88.96 94.58 100.48 106.71 113.30 120.29 127.73

values in millions

Historical Ratios and Valuation Model

Valuation (in millions where appropriate) -- through year 2019E

Capital Asset Pricing Model

Forecasted Ratios and Valuation Model -- 10 Years

Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- 10 Years

Weighted Average Cost of Capital Calculations


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BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH

Inputs 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019EPer share value (hist. & DCF est.) $33.72 $44.33 $58.91 $62.19 $62.44 $87.73 $94.09 $100.83 $108.07 $115.80 $124.09 $133.06 $142.69 $152.93 $163.90

Market capitalization $42,501 $54,703 $70,003 $70,063 $68,197 $92,947 $96,688 $100,512 $104,499 $108,605 $112,895 $117,420 $122,143 $126,980 $132,005

EBITDA $3,684 $4,833 $3,632 $6,158 $6,487 $6,389 $6,644 $6,943 $7,360 $7,728 $8,114 $8,479 $8,819 $9,127 $9,401

Enterprise Value $47,718 $60,965 $76,458 $78,186 $76,961 $101,291 $104,839 $108,590 $112,740 $116,759 $120,864 $124,932 $128,965 $132,964 $136,936

MultiplesPrice/Sales 2.22 2.62 3.07 2.98 3.00 3.95 3.95 3.93 3.85 3.81 3.78 3.76 3.76 3.78 3.81

Price/EBITDA 11.54 11.32 19.27 11.38 10.51 14.55 14.55 14.48 14.20 14.05 13.91 13.85 13.85 13.91 14.04

Price/Free Cash Flow N/A 10.20 72.25 13.97 18.02 25.51 26.27 26.93 29.02 26.96 26.69 25.76 25.00 24.38 23.91

Enterprise Value/EBITDA 12.95 12.62 21.05 12.70 11.86 15.85 15.78 15.64 15.32 15.11 14.90 14.73 14.62 14.57 14.57

Price/Earnings 16.67 19.36 30.57 16.52 15.19 23.65 23.53 23.31 22.80 22.47 22.14 21.89 21.74 21.67 21.69

Free Cash Flow Yield 9.9% 1.4% 7.4% 5.6% 3.9% 3.8% 3.7% 3.4% 3.7% 3.7% 3.8% 3.9% 4.0% 4.1%

Dividend Yield 1.96% 2.19% 2.47% 2.56% 3.23% 3.16% 3.14% 3.19% 3.14% 3.19% 3.16% 3.10% 3.08% 3.13% 3.12%

Historical OverrideValuation Estimates Based On: Average w/Manual 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Price/Sales 2.78 $60.88 $65.27 $70.32 $76.85 $83.18 $90.04 $97.01 $104.01 $110.98 $117.84

Price/EBITDA 12.80 $77.21 $82.78 $89.18 $97.46 $105.49 $114.20 $123.02 $131.90 $140.74 $149.45

Price/Free Cash Flow 28.61 $98.37 $102.47 $107.13 $106.56 $122.90 $133.03 $147.78 $163.28 $179.43 $196.11

Enterprise Value/EBITDA 14.24 $85.84 $92.04 $99.16 $108.36 $117.29 $126.97 $136.78 $146.65 $156.48 $166.16

Price/Earnings 19.66 $73.95 $79.71 $86.24 $94.51 $102.75 $111.76 $121.17 $130.87 $140.71 $150.68

Low Price $60.88 $65.27 $70.32 $76.85 $83.18 $90.04 $97.01 $104.01 $110.98 $117.84

High Price $98.37 $102.47 $107.13 $108.36 $122.90 $133.03 $147.78 $163.28 $179.43 $196.11

DCF Price $87.73 $94.09 $100.83 $108.07 $115.80 $124.09 $133.06 $142.69 $152.93 $163.90

Historical Ratios and Valuation Forecasted Ratios and Valuation

Forecasted Stock Prices Based on Historical Multiples -- 10 Years

In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks ‐‐ P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year‐end stock prices and enter them in the first 5 (historical) years of the "per share value" category.2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47‐BP47.3. Market capitalization will be calculated as basic weighted shares x historical year‐end prices and then forecasted basic weighted shares x DCF forecasted prices.4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values.

$0 $15 $30 $45 $60 $75 $90

$105 $120 $135 $150 $165 $180 $195 $210

Forecasted

Value

Per Sha

re

Forecasted Per Share Stock Values

Low Price DCF Price High Price

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CF Price

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/EBITD

A

Price/Sales and Enterprise Value/EBITDA vs. Price

Price/Sales Enterprise Value/EBITDA Historical or DCF Price


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CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB

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Price/Earnings Ratio

Price/Earnings Ratio and Dividend Yield

Price/Earnings Ratio Dividend Yield

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argin

Gross, Operating and Net Profit Margins

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Return on Assets, Equity and Invested Capital

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NOPAT an

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NOPAT and Free Cash Flow (millions)

NOPAT Free Cash Flow

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Market V

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Economic Value Added & Market Value Added (millions)

Economic Value Added Market Value Added

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EPS an

d DPS

Earnings and Dividends Per Share

Earnings Per Share Dividends Per Share


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DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV

01234567891011

Piotroski Score

Piotroski Financial Fitness Score (max = 11)

Piotroski Score

0123456789

101112

Altman

Z‐Score

Altman Probability of Bankruptcy Z‐Score

Altman Z‐Score

Z >2.9 = Safe, 1.23 < Z < 2.9 = Grey Area, Z < 1.23 = Distress

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