McDonald’s Corporation

McDonald’s Corporation Financial Analysis By Brenda Hudson, John Doeand Mary Smith BUS307 Research Project

McDonald’s Business Overview • Largest fast food restaurant operator • Serves 47 + million people daily • 31,xxx restaurants in 121 countries • 23,xxx are company-owned • 7,8xx are franchised or affiliated • System-wide sales of $33 + billion

McDonald’s Income Statement • 2003 Revenues of $17.14 billion • 11.3% increase of which 5% was true revenue growth • Company-owned store revenue • $12,795.4 million • 74.7% of total • Franchises/affiliates revenue • $4,345.1 million • 25.3% of total

McDonald’s Income Statement • Net Income went up 65.7% • Revenues up by 11.3% • Operating Costs and Expenses up by only 7.6% • Total Op. Costs and Exp. – 83.5% of Revenue • Most expenses increased by 10-12.7% • SG&A increased by only 7% • Net Income beats industry • McDonalds Profit Margin = 8.6% • Industry Profit Margin = 7.24% • Wendy’s Profit Margin = 7.5%

McDonald’s Balance Sheet • 2003 Total Assets of $25.525 billion up by 6.5% • Current Assets up 9.9% led by: • Cash up 49.2% • Prepaid Expenses & Other Current Assets up by 26.5% • Accounts & Notes Receivable down by 14.1% • Largest Current Asset • McDonald’s Current Assets are 7.4% of Total Assets vs. Wendy’s (14.6%)

McDonald’s Balance Sheet • 2003 Total Assets of $25.525 billion up by 6.5% • Net Property and Equipment • Largest Asset, Fixed Asset • 78.1% of assets (compare to Wendy’s (68.1%)) • Increased 7.2% • Long-term Debt • Largest Liability • 36.6% of assets (compare to Wendy’s (21.9%)) • Decreased by 3.7%

McDonald’s Ratio Analysis Current Ratio • McDonald’s: 0.76 vs. Industry: 0.945 vs. Wendy’s 0.87 Quick Ratio • McDonald’s: 0.71 vs. Industry: 0.572 vs. Wendy’s 0.56 High Inventory Turns – Better than comparables • McDonald’s: 132.5x vs. Industry: 41.0x vs. Wendy’s 39.05x Days Sales Outstanding: • 15.4 days down 4.6 days from 2002 • Receivables Turns – Lower than comparables • McDonald’s 23.3 x/yr Vs. Industry: 36.8x/yr vs. Wendy’s 29.83x/yr

McDonald’s Ratio Analysis Lower Total Asset Turns: • McDonald’s: 0.67 vs. Industry: 1.25 vs. Wendy’s 1.11 Higher Debt Ratio: • McDonald’s: 53.1% vs. Industry: 38.35% vs. Wendy’s 29.58% Higher Profit Margin: • McDonald’s: 8.6% vs. Industry: 7.24% vs. Wendy’s 7.5% BEP, ROA, ROE trending up, but well below industry and competition Price/Earnings is lower than industry, higher than Wendy’s • McDonald’s: 21.59 vs. Industry: 27.73 vs. Wendy’s: 20.65

McDonald’s Beta, Required Return & Stock Price • McDonald’s beta = 0.73 • Wendy’s beta = 0.363, Yum! Brands = 0.426, Restaurant Industry Beta = 0.57 • Cross-Industry Market Norm = 1 • McDonald’s σ of 10 years past returns = 40.1%

McDonald’s Beta, Required Return & Stock Price • McDonald’s Required Rate of Return • Security Market Line (SML) – 11.2% • Capital Market Line (CML) – 18.9% • Average Required Return= 15.05% • Sources: • KRf = 5.7% (long-term government bond yield) • KM = 12.7% (Long term yield on Large Stocks (1926-2001)) • Market σ of 10 years past returns = 21.05% • McDonald’s σ of 10 years past returns = 40.1%

McDonald’s Beta, Required Return & Stock Price • McDonald’s Target Stock Price • Four Methods: • Price Earnings – Average = $44.37 • Market Book – Average = $32.9 • Gordon Dividend Growth Model = $7.46 • Ben Graham Model – $24.24 • Average Target Price is $32.20. • Excluded Gordon Dividend Cost

McDonald’s Debt • Current Liabilities up by 2.6% • $9.7 billion in Long-term debt (including current maturities) • 3% decrease from 2002 • 16 bonds maturing from 2004 to 2033 at coupon rates of 4.15% to 8.875% • Weighted Average Interest Rate on total debt = 4.1% • Long Term Debt Ratings: • Moody’s: A2, S&P: A, Fitch A • Interest Expense up by 3.7% to 388 million

McDonald’s Stock & Dividend History • Public since 1966 • Market Cap = $36.6 billion • Modest dividend strategy • Current dividend is 40¢ / year • Dividend increased 70% in 2003 • Increased 29 times since 1976 • Twelve Stock Splits • Average annual stock appreciation of 20.8% • Stock Repurchase of $439 million in 2003 (18.9 million shares)

McDonald’s Improvement Strategies Undertaking “Revitalization” Strategy • Reduce Operational Expenses • Reduce SG&A – dollars toward systems, menu expansion, training • Asset Management and Utilization • Reduce net capital spending • Close underperforming restaurants • Cautious expansion • Increase same-restaurant sales • Hedges are planned to combat weak foreign currencies • Strategies for PR and food safety in light of mad cow disease in some areas • Tighten Quality Control within franchises • Expand Partner Brands – be own competitor • Cross-sell other products in restaurants

McDonald’s Summary &Our Recommendations • McDonald’s is restaurant segment leader – 40% domestic quick-service restaurant market share • Generates tremendous cash flow • (Over $2 billion in 2003) • Growth possibilities • They are beyond high growth phase in US, but still room for same-restaurant improvement and new restaurants in some US markets • Continue to replicate US success internationally • Fast food restaurant market segment in trouble, but McDonald’s is the leader in this segment.

McDonald’s Corporation