EQUITY VALUATION IN PRACTICE McDonald’s Corp

EQUITY VALUATION IN PRACTICE McDonald’s Corp

Initiation of Coverage

McDonald’s Corp

NYSE list: “MCD”

Rating: SELL

The following analysis presents the coverage of McDonald’s Corp with a SELL rating. McDonalds is facing stiff competition, and it is performing dismally in its market as elucidated in gradually declining financial performance. The company’s market share is shrinking as the health awareness grow, and new small first food companies emerge mainly the USA fast food market. Even though the company has a global presence (mainly through franchising), McDonalds relies extensively on the America market which generates about 40% of its total operating income. Fast food industry is currently facing challenges such as customers changing tastes, and increasing competition mainly from Starbucks and Yum Brands. Given the conservative approach to marketing and preparing food that this fast food chain uses, we expect that its revenue will be weaker especially in the USA market, Canada, France, and Germany. The emergence of next generation quick service restaurants threatens the stability and profitability of McDonald. All these reasons make the decline in the company’s stock and therefore we are recommending a sell decision at the current price of $128.14, given that the price is next generation quick service restaurants expected to be low to $95.65.

INVESTMENT HIGHLIGHTS

Competitive business model, backed by highly skilled team and supported by marketing campaign

McDonald’s has adopted a simple business model, where it offers quality food, consistent dining experience, and fast service in all places where it has experience. More 80% of the McDonald’s restaurants are franchised, where the franchise owners are given access to the McDonald’ system of selling and cooking food and enjoys extensive advertising. 20 of the top 50 corporate staff employees of the restaurant started as employee giving them a high level of experience in running the restaurant. The restaurant chain is increasing its size of Quarter Pounders, and improving the quality of its Burgers (McDonald 2016a).

On addition, the company strong brand name has enabled it to grow in European countries, and it is now targeting more developing economies to continue its growth trend. McDonald has a strong global brand image, diversified income moderate market diversification, and standardized process. In 2015, the restaurant announced it will franchise more than 3,500 restaurants by 2018 and increase its global franchising from current 81% to 90% (McDonald 2016b).

McDonald cash flow increased significantly between 2014 and 20.15 which shows the increasing restaurant’s liquidity. The net cash and cash equivalent increased from -$721 million in 2014 to $5607 million in 2015 as illustrated below

Table 1.0 McDonald’s cash flow

KEY INVESTMENT NEGATIVES

Reducing profitability

McDonald level of profitability has been declining gradually since 2013. This is due to increase competitive pressure, an……………….