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McDonald's Business Overview and Recommendations

Explore McDonald's as the world's #1 fast-food chain, its products, revenue breakdown, industry outlook, SWOT analysis, recent news, and management assessment. Recommendations for holding McDonald's shares.

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McDonald's Business Overview and Recommendations

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  1. Alex Florea Steven Kahan Michael Lavin Eric Xu Yana Zalukina Carol Zhou

  2. Business Overview • World’s #1 fast-food chain by sales • Competitors: • Burger King Holdings, Inc. • Yum! Bands, Inc. (KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W ) • Wendy’s International, Inc. • Doctor's Associates, Inc. (Subway) • Products: • Hamburgers • Chicken sandwiches and products • French fries • Breakfast items • Salads • Soft drinks • Desserts Source: http://www.adamseal.com/Portfolio/?p=261 (Assessed Nov. 15, 2009)

  3. Fact Sheet • Headquarters: Oak Brook, Illinois • 32,278 restaurants in 118 countries (as of September 30, 2009): • Serves 47 million customers daily • Employs over 1.5 million people

  4. Types of Restaurants • Counter and drive-through services • Locations: • Stand-alone basis in cities and suburban areas • Connected to gas stations/convenience stores • Shopping malls • Wal-Mart stores • Truck stops • Features indoor and outdoor playgrounds for children

  5. Business Model • 25,975 (80.5%) operated by franchisees and affiliates • 6,303 (19.5%) operated by the Company • Collects from franchisees: • Initial investment fees • Royalties (% of sales) • Rent (% of sales) • Supply food and materials to restaurants through approved 3rd parties

  6. Geographical Revenue Breakdown • APMEA: Asia/Pacific, Middle East and Africa • Other Countries and Corporate: includes operations in Canada and Latin America, as well as Corporate activities

  7. Macroeconomic Outlook • McDonald's looks to compete in the high-margin beverages market with "McCafe”. • Separate niches with McDonald's being the better value proposition and Starbucks offering more of a quality experience. • Strong International Growth is Driving Sales. • 60% of sales occur outside of the United States. • Changes in consumer preferences could decrease sales. • Consumer preferences continue to gravitate towards more nutritional food. • Commodity Costs can Impact Margins. • Since 2005, food prices have increased substantially, but competition has prevented McDonald's from passing costs along to customers. Thus, increasing input prices have come at the expense of margins. • Sensitive to the Dollar. • Higher translated value.

  8. Industry Overview • Industry performance continued to be battered by economic recession. • Society's increasing awareness of the health risks associated with a high fat, salt and sugar diet. • Total market saturation • Intense competition • Low level of concentration

  9. Major Players

  10. SWOT Analysis

  11. 5-Year Historical Performance http://www.google.com/finance?q=mcd; Nov 24, 2009

  12. Recent News • Sep. 24: raised quarterly cash dividend by 10%; (McDonald's has raised its dividend each and every year since paying its first dividend in 1976) • Oct. 22: third quarter sales in every area of the world increase by around 2%-3% • Nov. 13: Chicago Tribune News (compete in low-price market; lower gross margin at least in a short term period)

  13. Ratio Analysis Net Profit Margin Comp. Sales Growth Sales per Restaurant ROE www.wikinvest.com/stock.mcdonald’s_(MCD); November 30, 2009

  14. Income Statement Assumptions

  15. WACC Calculation

  16. Discounted Cash Flow

  17. Football Chart

  18. Management Assessment • The management has been consistent in its dividend policy: till date company has returned approximately $11.5 billion. • Management reviews and analyzes business results in constant currencies however we believe the company has been conservative in hedging the currency risk. • Management continues to focus on the mix of franchised and company-owned operations to boost the competitive margin. • McCafe had met sales expectations and has benefited from the high level of advertising that McDonald's has committed to it. Coffee sales now make up 5% of McDonald's total sales.

  19. Recommendation • Holdings in McDonald’s are currently 200 shares bought at $52.44 • Closing price on November 30, 2009 was $63.25 • Using a triangulation of the methodologies, the calculated intrinsic value is $61.05 • Qualitative factors: • MCD is a very attractive company • The stock is at an all time high • MCD might outperform the market and its peers during a market correction. • HOLD

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