McDonalds Corporation

Financial Analysis
By Brenda Hudson, John Doe and Mary Smith BUS307 Research Project

McDonalds 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

McDonalds 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

McDonalds 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% Wendys Profit Margin = 7.5%

McDonalds 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

McDonalds Current Assets are 7.4% of Total Assets vs. Wendys (14.6%)

McDonalds 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 Wendys (68.1%)) Increased 7.2%

Long-term Debt
Largest Liability 36.6% of assets (compare to Wendys (21.9%)) Decreased by 3.7%

McDonalds Ratio Analysis

Current Ratio
McDonalds: 0.76 vs. Industry: 0.945 vs. Wendys 0.87

Quick Ratio
McDonalds: 0.71 vs. Industry: 0.572 vs. Wendys 0.56

High Inventory Turns Better than comparables

McDonalds: 132.5x vs. Industry: 41.0x vs. Wendys 39.05x

Days Sales Outstanding:

15.4 days down 4.6 days from 2002 Receivables Turns Lower than comparables
McDonalds 23.3 x/yr Vs. Industry: 36.8x/yr vs. Wendys 29.83x/yr

McDonalds Ratio Analysis

Lower Total Asset Turns:
McDonalds: 0.67 vs. Industry: 1.25 vs. Wendys 1.11

Higher Debt Ratio:

McDonalds: 53.1% vs. Industry: 38.35% vs. Wendys 29.58%

Higher Profit Margin:

McDonalds: 8.6% vs. Industry: 7.24% vs. Wendys 7.5%

BEP, ROA, ROE trending up, but well below industry and competition Price/Earnings is lower than industry, higher than Wendys
McDonalds: 21.59 vs. Industry: 27.73 vs. Wendys: 20.65

McDonalds Beta, Required Return & Stock Price

McDonalds beta = 0.73
Wendys beta = 0.363, Yum! Brands = 0.426, Restaurant Industry Beta = 0.57 Cross-Industry Market Norm = 1 McDonalds of 10 years past returns = 40.1%

McDonalds Beta, Required Return & Stock Price

McDonalds 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 (19262001)) Market of 10 years past returns = 21.05% McDonalds of 10 years past returns = 40.1%

McDonalds Beta, Required Return & Stock Price

McDonalds 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

McDonalds 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:
Moodys: A2, S&P: A, Fitch A

Interest Expense up by 3.7% to 388 million

McDonalds 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)

McDonalds 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

 McDonalds is restaurant segment leader 40% domestic quick-service restaurant market share Generates tremendous cash flow
(Over $2 billion in 2003)

McDonalds Summary & Our Recommendations

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 McDonalds is the leader in this segment.