mcdonald’s shivam khanna brandon mcarthur march 3, 2009
TRANSCRIPT
McDonald’s
Shivam Khanna
Brandon McArthur
March 3, 2009
Agenda
• Macroeconomic Review• Industry Overview• McDonalds Overview• Historical Performance• Recent Events/Performance• Financial Projections
Macroeconomic Overview
• U.S GDP 4th Quarter 2008 Down 6.2%• Worst Economic Crisis since Great
Depression• Dow Jones Down about 50% from a year
ago currently near 6,750 • The Dow fell almost 12% in February• S&P 500 fell 11%, its weakest February
since 1933; Consumer Confidence & Unemployment at historic lows
Fast Food Industry
• Focus on Convenience
• Heavily Saturated Market with a few large leaders
• Movement towards Franchising versus Company Owned
• McDonalds viewed as Market Leader (Market Cap: $58billion)
McDonald’s Overview
• Leading global foodservice retailer
• Serves 52mm people a day in 100 countries
• Headquartered in Oakbrook, IL
• 31,967 restaurants in 118 countries, – 18,402 operated by franchisees; – 4,137 operated by affiliates;– 6,502 were operated by the company.
• U.S Store Growth“Being Better Not Just Bigger”
• Expanding product offerings– Healthier menu transition– McCafe Specialty Drinks
• Increased franchising– Many company operated store are being
franchised, especially in Europe– Decreases top line, increases margins
Strategy
Systemwide Sales: sales at all restaurants, whetheroperated by the Company, by franchisees or by affiliates (6.9%)
Comparable Sales: percent change in constant currencysales from the same period in the prior year for all restaurantsin operation at least thirteen months, including those temporarilyclosed. Does not include Sales by franchisees and affiliates are not recorded as revenues by the Company (11%)
Return on Incremented Invested Capital:evaluates the overall profitability of the business units,the effectiveness of capital deployed and the future allocationof capital
Measuring Growth
Shareholder structure
5 Year Historical Performance
•Uniform menu offerings can be mass produced, lowering production costs. •Bargaining power with suppliers lowers input costs and boosts margins. •Large advertising budget means lots of domestic and international exposure. •Viewed as Market Leader
Strengths Weaknesses
Opportunities•Expansion of McCafe’s Specialty Drink Business•Store Growth Internationally (specifically china)
Threats•Currency Risks•Inability to create new products•Shift of consumer demand (health conscious)
•Heavy Dependence on Commodity Cost (Beef, Chicken)•U.S Saturated Market
Debt Financing
• Unused 1.3B line of credit expiring in 2012
• No plan to pay back debt before maturity
• Most of the Debt of is long term
Risk Management• Hedge Interest Rate Risks through Swaps• Forward Foreign Exchange contracts mitigate
Currency Risk
Computing Wacc
• Cost of Equity- Beta: 0.9
- Rf: 4%- (Rm – Rf): 6%- Ke: 9.4%
• Cost of Debt - Kd: 4.7% (Weighted average of all debt of company)
• Wd: 14.2% We: 85.8% Tax Rate: 35%
• WACC: 8.5%WACC: 8.5%
Computing WACC• Return on Equity (experienced 2002-2007): 14.85%
• ke (from CAPM): 9.4%
• Average: 12.13%• Spread: 2.72%
• New ke: 10.72%
• New WACC: 9.62%
9.4% 14.85%
12.13%
10.72%
DCF Analysis
DCF Valuation ($MM)Sum of P.V. of FCF $86,928Minus Outstanding Debt -$10,262Equity Value $76,666Divided by shares outstanding $63.27Equals Value +/- 10% 69.59 / 56.94
Operating leases
• Company owns 45% of land and about 70% of buildings
• As of 31st December 2007, the company was the lessee at 13,322 restaurant locations
Future Minimum Payments under operating leases ($mm)Restaurant Other Total
2008 989.7 64.1 1053.82009 918.2 55.4 973.62010 853.9 44.6 898.52011 786.8 35.2 8222012 729.6 27.7 757.3
Thereafter 5869.5 139.1 6008.6Total Minimum Payments 10147.7 366.1 10513.8
Operating leases
Present Value of Operating Leases1 2 3 4 5 5
2008 2009 2010 2011 2012 Thereafter1053.8 973.6 898.5 822 757.3 6008.6
Present Value 951.79 794.23 662.01 547.02 455.18 3611.49
Sum PV 7021.71
DCF Valuation ($MM)Sum of P.V. of FCF $86,927.90Minus Outstanding Debt -$10,262.00Minus Contractual obligations(PV) -$7,021.71Equity Value $69,644.19Divided by shares outstanding $57.47Equals Value +/- 10% 63.22 / 51.72
Operating leases
• Franchise agreements also include a minimum rent payment that parallel the underlying leases and escalations
Future Minimum rent payments due to the company ($mm)Owned Sites Leased Sites Total
2008 1120.1 933.4 2053.52009 1084.3 905.8 1990.12010 1045.2 874.5 1919.72011 995.6 838.2 1833.82012 959.3 809 1768.3
Thereafter 7117.7 5414.8 12532.5Total Minimum Payments 12322.2 9775.7 22097.9
Comparables
• McDonald’s - Return on Equity: 30.10%- Return on Assets: 13.58%- P/E Ratio: 12.35- Payout Ratio: 42%- Operating Margins: 26.71%- Leverage Ratio: 15%
• Burger King- Return on Equity: 22.18%- Return on Assets: 8.38%- P/E Ratio: 12.98- Payout Ratio: 18%- Operating Margins: 13.70%- Leverage Ratio: 26%
• Yum Brands - Return on Equity: 187%- Return on Assets: 13.09%- P/E Ratio: 10.76- Payout Ratio: 35%- Operating Margins: 12.7%- Leverage Ratio: 23.2%
• Industry- P/E Ratio: 10.46- Operating Margins:4.84%
Company Margins
• EBIT margins- Company has witnessed a growth in margins from 13% in 2003
to 33% in 2008 • Net Profit Margins
- Company has witnessed an increase in margins from about 8%(2002) to 18.35%(2008)
• Company has a dividend payout ratio of approximately 42%
Dividend Payout Ratio
• Is it sustainable?- Is it possible for the company to maintain this payout ratio assuming situation deteriorates?
Yes - Out of the $5.8 billion paid out in 2008, $1.8billion was in the form of dividends- Company has raised dividend for 32 consecutive years- Company is evolving into a less capital intensive business- 2007 ending cash balance was $5billion. Steady cash flows will from franchisees- 2008 was a very tough year for markets and McDonald’s raised dividend in 4th quarter
Outlook for McDonald's
• Company plans to evolve to a less capital intensive business with more stable cash flows- Company plans to re-franchise approximately 1000 stores by 2010 of which 675
were re-franchised in 2008. Results in a higher margin as a % of revenues
• Company plans capital outlay of approximately $2-$2.5 annually
- $1billion o revamp existing stores and remaining for new stores
Store growth
Restaurants at December 31, 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Operated by franchisees(1) 18,324 18,685 20,505 25,367 26,307 27,159 27,824 28,503 29,195 29,901 30,621 31,356Operated by the Company 8,173 8,166 6,906 6,606 6,306 6,106 6,106 6,106 6,106 6,106 6,106 6,106
New stores -7 -1,260 -300 -300 -200 0 0 0 0 0 0Operated by affiliates 4,269 4,195 3,966Systemwide restaurants 30,766 31,046 31,377 31,973 32,613 33,265 33,930 34,609 35,301 36,007 36,727 37,462
% growth 0.91% 1.07% 1.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Revenue per store ($mm) 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Company owned 1.715 1.886 2.405 2.646 2.857 3.029 3.180 3.339 3.506 3.682 3.866 4.059% growth 10.0% 27.5% 10.0% 8.0% 6.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%Franchisees and affiliates 0.226 0.240 0.252 0.265 0.278 0.292 0.307 0.322 0.338 0.355 0.373 0.391% growth 6.4% 5.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Outlook for McDonald's
• Company planned to return $15-$17 billion worth of cash to shareholder’s between 2007-2009- Till date company has returned approximately $11.5 billion
- Company plans to purchase shares upto $10billion from public without a specific timeline. Purchased $4billion worth of stock in 2008 and $3.9billion worth of stock in 2007
• Company increased dividend rate in 4th quarter of 2008 by 33% taking its annual dividend amount to $2
Outlook for McDonald’s
• Company has seen increased margins from Franchisees- Up from 73% in 2003 to 82% in 2008
• Company has witnessed strong double digit growth in China and India and views these markets as potential growth
• Has introduced a range of new breakfast/nutritious products that have achieved success and appealed to a new set of customers
Outlook for McDonald's
• Company has seen strong growth in Europe especially at McCafe’s- Plans to add 200 McCafe’s in 2009
- Plans on doubling the number of 24hr open restaurants
• No immediate reason to raise debt- Has strong credit ratings
- Most of debt is long term- Average borrowing cost of 4.7%
• Cheap prices help it benefit during a recession
Risks
• Foreign Currency continues to be biggest risk for company - Approximately 65% of debt is in foreign denominated currency
- Company has greatest exposure to Euro, GDP, Canadian Dollar, Australian dollar (approx 70% of all revenues)
- If all the currencies changed by 10% in the same direction company’s annual net income would change by about 12-15 cents. Weak dollar in 2009 could negatively affect earnings
• Lawsuits• Decline in demand; Failure to launch new
products• Rise in price of inputs
Conclusion
• We recommend purchase of 200 Shares McDonald's at the current market price
– Stock Market has declined over 50% in 1 year and Mcd’s has fallen about 30%