No Moss

What Is McDonald's Thinking?

"Their balance sheet is so terrible; their net debt to net debt plus equity is up over 73%. What this means is any impairment of its assets will cause shareholder equity serious damage - and consider that 2.18 of its book value of $3.02 comes from Goodwill. In a rising rate environment this stock could suffer serious damage."

Sorry, I had to laugh at this analysis. Their "net equity" includes a huge debit (reduction of equity) for treasury stock. For those unacquainted with the term, treasury stock is stock that has been repurchased by the company. While this nominally reduces equity, it is actually a huge plus. The company could pay off all of its long-term debt by either sellling half of its treasury stock, or alternatively pay off its debt in a few years by ceasing to buy back stock for that period.

Goodwill arises when you pay more for an investment than the book (historical) value of that investment. The net difference is booked as goodwill. To give you an example of how that works, if you bought McDonald's today, you would pay far more than its book value--hugely more. Just on the basis of real estate, they have $21 billion in net book value (asset historical cost minus accumulated depreciation) which is actually worth, I would guess, at least three times that amount. Do you think McDonald's would actually sell an urban corner lot purchased 20 years ago for what it paid for it, much less its net book value? Then you would have to pay for the value of McDonald's as an incredibly successful business (the term goodwill actually stems from the reputation of a business and the value of its brand).

MickeyD is a formidable cash machine. It generated about $6 billion in cash flow from operations in 2008, and used about $4 billion of that to repurchase stock. The real question is whether MCD's shareholders are better served by paying off debt or by repurchasing stock and receiving dividends.

The mistake that most people make in analyzing MCD is to think of it as a restaurant company. It is a huge REIT, a franchisor, and a restaurant company. As a REIT, it collects increasing rent revenue even as the net book value of the rented properties decreases. This accounting anomaly gives rise to the use of FFO, or funds from operations, as a method of computing the real return (and the source of dividends) for REITs.

What it is also becoming is an investment company, it business plan being to actually invest in companies that purchase land and property for new restaurants. This allows them to increase their return on assets.

McDonald's: Solid Dividend Yield, Above Average Growth

I think of MCD as a REIT with a bonus (the franchise fee), and then as a fast food company. I wonder if they could afford larger dividends based on funds from operations (FFO).

The price of gas will hurt them more than most because of those prime freeway locations, and it throws some cold water on the Sinopec deal (building a Mickey D at thousands of gas stations in China). I believe we can expect some normalization of oil prices, but the days of freewheelin' across America are over. They'll have to concentrate more on "local" business.

Anyway, good company. Helped now by rapid expansion abroad and by the weak dollar, but steadily increasing in value based on its prime real estate as a bonus.

McDonalds Is a Real Estate Company

"McDonald's simply owns the best commercial property in the world." I've spent years in Asia, and that's the truth--about every restaurant I've seen, from Taiwan, Indonesia, China....

Well-chosen locations, 8% franchise fee, continuing to convert from ownership to franchise...Super REIT.

Don't Get Fried With McDonald's - Barron's

Agreed, RPK. Their strategy is to continue to grow the company and to continue to increase the percentage of franchised restaurants, which I believe is around 80%. That gives them larger and larger cash flow, since rental income is offset by depreciation expense (which is non-cash, of course). Cash flow is what they use to feed the stockholders. Net growth in restaurants is fairly small right now, but the deal with Sinopec could change that. Urbanization in China also offers amazing growth potential.

If the coffee thingy is a home run, that's much higher margin than hamburgers. I think it will do OK, probably in non-urban areas where Starbucks are thin on the ground.

Don't Get Fried With McDonald's - Barron's

Well, let me see here. The recession is here and McDonald's food is cheap. McDonald's is a huge overseas play and the dollar is cheap. McCafe looks like it's a winner, if not a home run, and coffee is expensive. McDonald's recent deal with China's biggest gas station company will eventually lead to an additional 30,000 Micky Dees in China. Gee, there's uh, uh, about 31,000 MDee's right now, so that's, uh, about 100% growth. China's population growth is still in process, despite the one-child policy, it's urban base is increasing rapidly (and concentrating, i.e., becoming more dense), and the Chinese, if you haven't noticed, have become more prosperous. Can you say explosive growth in Chinese?

Yep, looks like just the right time to sell to me! Can't imagine it selling at that enormous 17x earnings. Short the beast!