McDonald’s (MCD) Stock Analysis

McDonald’s (MCD) Intrinsic Value – Margin of Safety Analysis            

(updated December 2024)

Normalized Diluted Earnings Per Share (TTM): $11.39
Free Cash Flow Per Share (TTM): $9.09
Cash Flow From Operations (CFO) Per Share (TTM): $12.85

Estimated Intrinsic Value: $213

Target Buy Price Based on Required Margin of Safety =  $178
(Required Margin of Safety Based On Risk Stability Grade:

A = 0%, B = 20%, C = 40%, D = 60%, F = 80%)

Target SELL Price Based on Estimated Intrinsic Value = $267
(Allow Overvaluation Adjusted by Risk Stability Grade:

A = 40%, B = 25%, C = 15%, D = 5%, F = 0%)

Risk / Stability Grade: B

A grade indicates a quality company with a strong balance sheet, high earnings quality, and a positive business environment. These stocks require the slimmest margin of safety within the stock universe.

B grade indicates a company with a good balance sheet, good earning quality, and a stable business environment. The margin of safety required should be greater than stocks with an A grade but less than the average stock.

C grade indicates a company with a sufficient balance sheet, at least average earnings quality, and a reasonably stable business environment. The margin of safety required is greater than A & B stocks, but less than D & F stocks.

D grade indicates a company in good standing but has issues that could affect its stability and long term risks. D rated stocks should require a large margin of safety when purchased.

F grade indicates a company with significant issues that are currently affecting its stability and long term risks. Require an extremely large margin of safety for F rated stocks when purchased.

Financial Risk Grade: B

A grade indicates an extremely low probability of a dividend cut. This rating is reserved for companies with strong balance sheets and/or excellent dividend histories.

B grade indicates a very low probability for a dividend cut.

C grade indicates a low probability for a dividend cut and/or average safety risk.

D grade indicates there are issues that should be considered concerning future dividend payments.

F grade indicates serious dividend safety risks. Investors should complete comprehensive due diligence before investing.

Business Quality Grade: B

A grade indicates earnings quality is high or far above average.

B grade indicates earnings quality is good and/or above average.

C grade indicates earnings quality is acceptable or average.

D grade indicates earnings quality is poor and requires thoughtful due diligence.

F grade indicates the quality of the earnings is poor or far below average requiring serious due diligence.

Earnings Report: 9/30/24

AAAMP Portfolios Position Disclosures:
Treasure Trove Dividend (TTD) – None
Global Dividend Value (GDV) – None
Dividend Growth & Income (DGI) – None
Global Value (GV) – None
Global Value Aggressive (GVA) – None
Global Conservative Income (GCI) – None 
Global Aggressive Income (GAI) – None

Company Description

Sector: Consumer Cyclical
Industry: Restaurants

McDonald’s Corporation is the largest restaurant owner-operator in the world with 42,000+ stores in 115 countries and approximately $130 billion in total sales.

McDonald’s revolutionized the restaurant industry with a cheap and fast core menu, building its foundation through partnerships with independent restaurant franchisees.

The firm earns 60% of its revenue from franchise royalty fees and lease payments, with the remainder coming from company-operated stores across its three core segments: the United States, internationally operated markets, and international developmental/licensed.

McDonald’s owns 55% of the real estate and 80% of the buildings in its franchise system, offering it substantial leverage in maintaining quality standards and consistency across markets.

SWOT Analysis For McDonald’s

Strengths

McDonald’s powerful brand and size (which provides economies of scale) provide sustainable competitive advantages. McDonald’s has enjoyed world wide success because of its franchisee system (local entrepreneur ownership), a uniform value priced menu of iconic choices, and corporate management that has generally provided a platform for success.

With a modernized restaurant real estate footprint after $9 billion in remodeling investments, McDonald’s is well positioned to take advantage of evolving digital ordering habits.

Weaknesses

Volatility in commodity prices, rising labor costs, food borne illnesses, and foreign currency fluctuations (over 60% of MCD profits come from outside the U.S) are all part of the challenges of operating a global company. Low barriers to entry allow intense competition from global, regional, and local competitors.

Opportunities

The company is making a big effort to become more flexible. Its recent successful move to serve breakfast all day was an example. They’re doing some limited experiments with different formats that provide more ordering flexibility (i.e. kiosks, and mobile ordering), and menu customization (ability to custom build burgers and sandwiches).

With delivery being a major trend no one is better positioned that McDonalds when it comes to location. McDonalds is closer to more customers than any other restaurant in the world. In McDonalds top 5 markets nearly 75% of the population lives within three miles of one of their restaurants.

Threats

The quick service restaurant industry is extremely competitive, subject to price wars, rising labor costs, and increasing concerns about food quality and healthy eating. The fast casual category is very mature and growing chains such as Five Guys, In-N-Out Burger, and Shake Shack put pressure on McDonalds to keep prices low and/or upgrade their product offerings. It’s a tough business.

Disclaimer:
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.