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Alex Florea Michael Lavin Andrew Lee Victor Murthi Wei Yan

Alex Florea Michael Lavin Andrew Lee Victor Murthi Wei Yan. 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.

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Alex Florea Michael Lavin Andrew Lee Victor Murthi Wei Yan

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  1. Alex Florea Michael Lavin Andrew Lee Victor Murthi Wei Yan

  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 • 32,478 restaurants in 117 countries (as of Dec. 31, 2009): • Serves 58 million customers daily • Employs 385,000 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 • 26,216 (80.72%) franchisee and affiliate operated stores • 6,262 (19.28%) company operated stores • Collects from franchisees: • Initial investment fees • Royalties (% of sales) • Rent (% of sales) • Supply food and materials to restaurants through approved 3rd parties

  6. Franchising • Down payment (Min. net worth of $.5MM) • 25% for existing stores • 40% for new locations • Financing • Established relations with banks facilitate loan • Ongoing Fees • 4% of Sales • Rent: Monthly base rent + % of Sales

  7. Geographical Revenue Breakdown

  8. Macroeconomic Outlook • 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 • 65% of sales occur outside of the United States • Changes in consumer preferences • Consumer preferences continue to gravitate towards healthy meals • Providing free Wi-Fi in all U.S. outlets • Commodity Costs can Impact Margins • Since 2005, food prices have increased substantially, but competition has prevented McDonald's from passing costs along to customers • Sensitive to the Dollar • Higher translated value

  9. Industry Overview • The current economic environment has increased consumer focus on value, heightening pricing pressures across the industry • Higher commodity prices are driving increases in food costs. • 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

  10. Major Players * Source: WikiInvest – McDonald’s on Feb. 21 2010

  11. SWOT Analysis Strengths: • Viewed as market leader • Bargaining power with suppliers lowers input costs and boosts margins • Branded affordability, menu variety, and beverages • Expansion and ongoing reinvestment • Management practices and controls Opportunities: • Growing beverage category (McCafe, smoothies and frappes in 2010) • Breakfast menu • International expansion (China, Russia, India) Weaknesses: • Heavy dependence on commodity cost (chicken, beef) • U.S. is becoming a saturated market Threats: • Currency risk • Shift in consumer demand (health conscious)

  12. 5-Year Historical Performance * Source: Yahoo Finance – McDonald’s on Feb. 21 2010

  13. Recent News • March. 15 (Future): Dividend payment of $0.55 / share • Feb. 10: Increases in comparable store sales growth for 2009 • 2.6% increase for United States – driven by continued focus on classic menu favorites, dollar menus, McCafe, and Angus Burger • 5.2% increase for Europe • 3.4% increase for APMEA • Jan. 22: Announced 2009Q4 EPS results of $1.03 (Analyst consensus $1.02) • Dec. 30: Unexpected departure of No.2 executive, Ralph Alvarez due to health concerns

  14. Management’s Outlook for 2010 • Remain focused on “better, not just bigger” strategy • Further differentiate brand, increase customer visits, and grow market share through: • Service enhancements • Restaurant reimaging (about half of the $2.4 billion of planned 2010 capital expenditures) • Menu innovation • Commodity costs are expected to be relatively flat, but fluctuations between quarters • SG&A are expected to remain relatively flat • Interest expense is expected to increase slightly compared to 2009 • Other half of $2.4 billion CapEx is for the opening of 1,000 new restaurants • Close 430 restaurants in Japan; tax impairment charges of $40-$50 million We are confident that management will execute these strategies while remaining disciplined in operations and financial management

  15. Key Strategies • U.S. Strategies: • Strengthen core menu and value offerings • Aggressively pursue new growth opportunities in chicken, breakfast, beverages, and snacking options • Planned introduction of smoothies and frappes in mid-2010 • Europe Strategies: • Focus on building market share by: • Upgrading restaurant ambiance by end of 2011 (mostly in France and U.K) • Leverage technology such as self-order kiosks, hand-held ordering devices, and drive-thru • Marketing initiatives • APMEA Strategies: • Market convenience, core menu, and branded affordability

  16. Five-Step DuPont Analysis Comp. Sales Growth Net Profit Margin ROE Sales per Restaurant

  17. Income Statement Assumptions

  18. WACC Calculation

  19. Discounted Cash Flow

  20. Public Comparables Analysis

  21. Triangulation & Football Chart

  22. Management Assessment • The management has been consistent in its dividend policy: In 2009, the company returned $5.1B to shareholders through a combination of shares repurchased and dividends paid, bringing the three-year total to $16.6B (consistent with management’s $15B - $17B target). • 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 evaluate opportunities to optimize 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. We are confident that similar attention will be devoted to developing the rollout of more beverages in 2010.

  23. Recommendation • Holdings in McDonald’s are currently 200 shares bought at $52.44 • Closing price on March 10, 2010 was $64.94 • Using a triangulation of the methodologies, the calculated intrinsic value is $65.28 • Qualitative factors: • MCD is a very attractive company with strong management • The stock is at an all time high • MCD might outperform the market and its peers during a market correction • HOLD, but buy 100 shares if price falls to $60.00

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