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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • McDonald's Corporation: cash flow valuation update 6 comments
    Mar 24, 2011 3:11 PM | about stocks: MCD
    Current Price: ~ $75/share
    Projected Yield: ~ 3.27%


    I believe McDonald's Corporation ($MCD) is fairly valued at $82/share on a cash flow valuation basis.    


    McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of December 2010, there were 32,700 locations in 117 countries, including 26,300 operated by franchisees/affiliates and 6,400 company units.

    I estimated the firm's WACC today at 7.16% using the Capital Asset Pricing Model and the company's recent SEC filings.
     
    Recent free cash flows and noted growth rates:
    Year
    FCF $Millions
    2001
    451
    2002
    338
    2003
    1586
    2004
    2335
    2005
    2730
    2006
    2600
    2007
    2930
    2008
    3782
    2009
    3799
    2010
    4206

    Average Annual Growth FCF: approx. 51%
    CAGR FCF: approx. 28%
    Consensus Forecast Industry 5-Year Growth: approx. 15% per year
    Consensus Forecast Company 5-Year Growth: approx. 10% per year
     
    Assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
     
    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    4206
    1
    4627
    2
    5089
    3
    5598
    4
    6158
    5
    6774
    Terminal Value
    104068


    The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $96,410 million. If the firm's fair value of debt is estimated at $11,505 million, then the fair value of the firm's equity could be $84,905 million.  $84,905 million / 1040 million outstanding shares is approximately $82 per share and a 20% margin of safety is $66/share.

    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: MCD
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Comments (6)
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  • alvarodpg
    , contributor
    Comments (3) | Send Message
     
    Hi Eric,

     

    It seems you were fair right; MCD is at eighty something today. I am just studying the FCFs valuation method at the MBA and am really interested at it. Btw I have chose MCD for the class work ;)

     

    Thanks very much,
    Alvaro.
    4 Jul 2011, 05:57 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Hi Alvaro:

     

    Congrats on going for the MBA and good luck. I'm a big van of FCF valuations and fundamental analysis in general. Here's hoping your analysis of MCD reveals many interesting points.

     

    Eric
    5 Jul 2011, 03:55 AM Reply Like
  • alvarodpg
    , contributor
    Comments (3) | Send Message
     
    Hi again Eric,

     

    I'm hands on this (my first) valuation, and as I was picking yahoo's finance cash flow statement and comparing with yours FCFs I realized of a difference in last years FCFs:

     

    - In yahoo it is stated a total capex of 2.056B while in your FCF I deduced a capex of 2.135B

     

    finance.yahoo.com/q/cf...

     

    The point is, I think yours is the right one according to MCD annual report:

     

    Capital expenditures
    In millions 2010 2009 2008
    New restaurants $ 968 $ 809 $ 897
    Existing restaurants 1,089 1,070 1,152
    Other(1) 78 73 87
    Total capital
    expenditures $ 2,135 $ 1,952 $ 2,136
    Total assets $31,975 $30,225 $28,462
    (1) Primarily corporate equipment and other office-related expenditures.

     

    That is to say, 78M is an expenditure (as noted in (1))while in yahoo statement it is considered as an income, how may this be possible? Is this a common mistake?
    10 Jul 2011, 03:24 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Hi Alvaro:

     

    FYI - I'm partial to Morningstar.com for all my financial data but I'm looking at Yahoo Finance now to compare:

     

    Yahoo Finance: On the annual cash flow statement for 2010 under cash flows provided by investing activities, CAPEX is listed at 2135.5 million and this is consistent with Morningstar's data which lists CAPEX at 2136 million.

     

    It is also consistent with MCD's 10K filing here: goo.gl/gqxJ8

     

    See the Consolidated Statement of Cash Flows on Page 30, Cash provided by investing activities: property and equipment expenditures: 2135.5 million -- so all appears consistent.

     

    The 2056 million figure that you mentioned is not precisely what Morningstar and Yahoo Finance refer to as CAPEX but it is the sum total cash flow from all investing activities for 2010.

     

    P.S. there are several different investing activities going on but CAPEX in this case is just the 2135.5 million cash flow listed for property and equipment expenditures - that which must be invested by the company annually or so to keep the business running.

     

    I hope this helps - Please let me know if any questions.

     

    Eric
    10 Jul 2011, 08:08 PM Reply Like
  • alvarodpg
    , contributor
    Comments (3) | Send Message
     
    Hi there Eric,

     

    Thanks very much for your comments, now I see; in Mc Donalds Annual 2010 report, they state:

     

    CAPEX 2010
    Investing activities
    Property and equipment expenditures (2,135.5)
    Purchases of restaurant businesses (183.4)
    Sales of restaurant businesses and property 377.9
    Proceeds on sale of investment
    Other (115.0)

     

    Which makes 2,056, so the point is that just property and equipment expenditures must be taken into account?

     

    I have discounted at 8,2% for WACC, then for a value of 84,4$ per share, with your method, increasing FCFs at 10%.

     

    The point is I tried to perform the complete method, trying to increase 10% the sales and then going for EBITDA, depretiation, etc. But I failed. Something wrong (around 160 $ ps).

     

    Thanks indeed for your help and comments!!
    12 Jul 2011, 01:39 PM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Alvaro:

     

    Sounds like you nailed the valuation on MCD. Glad I could help. Good luck for the remainder of the course.

     

    Eric
    12 Jul 2011, 03:15 PM Reply Like
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