This article is an unofficial supplement to an article by Kraken. In the article Kraken points out the difficulties that McDonald's (MCD) will be facing moving forward. It was a great article but being a mathematics teacher I wanted to see some more concrete evidence that the stock was in fact over priced, so I applied a discounted cash flow analysis to the stock and the numbers are quite convincing.
To start, the discounted cash flow model requires several inputs, which for my model are consensus estimates by the analysts covering the stock. The 2012 EPS estimate for the company is 5.73 and the five-year growth rate for the company is estimated to be approximately 10.54%. For a discount rate I used a rather conservative 20%. The DCF model output was a mild $69.78/share, which represents the present value of all future earnings going forward.
Now it wouldn't be fair to value the company based on earnings alone so it would only be right to incorporate the shareholder equity to account for the net assets the company holds. The $13.338 billion in net assets, when spread across the 1.023 billion outstanding shares, results in a shareholder value of $13.04.
Summing these values together, we arrive at an intrinsic value of $82.82/share, which is right in line with the 20% over valuation which Kraken had suggested. Now some may argue that McDonald's, being the stalwart that it is, should be valued at a premium. My counter argument to this is that there is no way that MCD could continue growing earnings at 10% every year, which is an assumption used in the DCF model. In the end all things balance out.
Based on this mathematical evidence and coupled with the economic evidence displayed in the article referenced at the beginning, I too, believe MCD is worthy of being called overvalued.