McDonald's Corporation (MCD) is a restaurant chain and an iconic brand. One that has been around for decades and has had a history of expansion and success. This success is manifested by the company's ability to have consistently grown revenues and earnings throughout its existence. McDonald's has grown EPS by 17% over the last seven years alone.
The company currently trades at $91.93, which is just about in the middle of its 52-week trading range of $82.01-$102.22. I have written about McDonald's in one of my newsletter editions before and rated the company a BUY at $79 based on actually conservative assumptions in the Gordon Growth Model (capital costs 10%, dividend growth 3%). I had a price target of about $110 on the stock. Since the stock pulled back from its high of $102, investors might find an investment interesting considering the temporary weakness in the markets.
McDonald's trades at around 15x earnings, which I consider generally to be a decent multiple for a company with a strong cash flow. However, I do expect the company to be product and market leader, to have a strong customer base and an international footprint proving the resilience of the business model in many countries. I believe McDonald's offers investors all of these. In addition, the company management and board are very shareholder-friendly, which justifies a premium on the current valuation. Investors do not only get to enjoy a regular dividend of 3%, but also profit from share repurchase programs the company almost regularly initiates.
I have an EPS estimate of $6.22 for the company's 2013 results, which is just slightly above consensus estimates of $6.14. A premium multiple of 18 yields a target price of $112, which is not far off the intrinsic value of $110 that I deviated from the Gordon Growth Model and the underlying assumptions mentioned above. That said, I believe McDonald's has an upside of around 20% from current quotes.
Investors who are looking for value and growth might want to add McDonald's to a diversified portfolio. Chart traders and contrarians should look at financials.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
