I believe MCD, at approximately $74/share, is fairly valued right now with little or no margin of safety.
McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer an uniform value-priced menu, with some regional variations. As of June 2010, there were 32,500 locations in 117 countries, including 26,200 operated by franchisees/affiliates and 6,300 company units.
(Source: Morningstar.com)
I estimated the firm's WACC at 7.37% using the Capital Asset Pricing Model and information from the company's recent SEC filings. ValuePro has an online baseline WACC calculator here. It calculates MCD's WACC at 6.77%. Assuming I missed the mark on my estimate, factor in no margin of safety and go with the lower figure: 6.77%.
MCD's recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2000 | 381 |
| 2001 | 451 |
| 2002 | 338 |
| 2003 | 1586 |
| 2004 | 2335 |
| 2005 | 2730 |
| 2006 | 2600 |
| 2007 | 2930 |
| 2008 | 3782 |
| 2009 | 3799 |
| TTM | 4041 |
Average Annual Growth: approx 52%
CAGR: approx 29%
Internal Growth Rate: approx 8%
Sustainable Growth Rate: approx 20%
Consensus Forecast Industry 5-Year Growth: approx 15% per year
Consensus Forecast Company 5-Year Growth: approx 10% per year
Factor in no margin of safety and go with the forecast 5-year growth rate of 10% per year, and assume that after the next five years, the company achieves no growth or 0% growth per year forever.
Discounted Cash Flow Valuation
| Year | FCF $ Millions |
| 0 | 4041 |
| 1 | 4445 |
| 2 | 4890 |
| 3 | 5379 |
| 4 | 5916 |
| 5 | 6508 |
| Terminal Value | 105744 |
The firm's future cash flows, discounted at a WACC of 6.77%, gives a present value for the entire firm (Debt + Equity) of $98,324 million. If the firm's fair value of all debt is estimated at $13,000 million, then the fair value of the firm's equity could be valued at $85,324 million.
$85,324 million / 1,060 million outstanding shares = $80.49 per share. A 20% margin of safety from here is approx $64 per share and MCD's current share price is approx $74. I consider MCD fairly valued today on a cash flow basis with little or no margin of safety.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
