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27 Equity Research

November 24, 2008 Ann Northrop, CFA

111 North Canal Street, Chicago, IL 60606

McDonald s Corporation
MCD: Zacks Company Report - BUY

McDonald s focus on core brands, its image make-over program, and innovative marketing campaigns have been successful. After doubling margins in its US operations, and improving them in Europe, the company is turning its focus to APMEA, where company-operated restaurant margins lag the US (by 120 basis points in 3Q08). Refranchising continues to be another engine of growth, bolstering ROA by an expected 100 basis points on a less capital-intensive business and a steady growth in royalties. Finally, we think additional margin and ROE expansion is possible as the company leverages its G&A through cost control initiatives and uses the cash generated from operations to retire debt, distribute dividends, and pursue share repurchases. With a strong balance sheet, we think this stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets.

Current Recommendation Prior Recommendation Date of Last Change Current Price (11/24/08) Six- Month Target Price

Buy Hold 07/29/2007 $55.51 $60.00

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh) Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2008 Estimate P/E using 2009 Estimate Zacks Rank $65.95 $50.75 -1.13 0.77 12,341,224 1,125 $62,431 0.83 95 0 $1.50 2.70 Risk Level Type of Stock Industry Zacks Rank in Industry Low Large-Growth Retail-Restaurants 5 of 47

(in millions of $)

Q1 (Mar) 2006 2007 2008 2009 4,914 A 5,293 A 5,615 A

Q2 (Jun) 5,367 A 5,839 A 6,075 A

Q3 (Sep) 5,503 A 5,901 A 6,267 A

Q4 (Dec) 5,445 A 5,754 A 5,733 E

Year (Dec) 20,895 A 22,787 A 23,690 E 24,590 E

7.0 17.9 27.3 15.7 15.3 14.5 2

Earnings per Share
(EPS is operating earnings before non recurring items)

2006 2007 2008 2009

Q1 (Mar) $0.50 A $0.63 A $0.81 A

Q2 (Jun) $0.58 A $0.71 A $0.94 A

Q3 (Sep) $0.69 A $0.83 A $1.05 A

Q4 (Dec) $0.61 A $0.73 A $0.83 E

Year (Dec) $2.38 A $2.99 A $3.63 E $3.83 E 11

Zacks Projected EPS Growth Rate - Next 5 Years %

© Copyright 2008, Zacks Investment Research. All Rights Reserved.

For this purpose. From 2007 through 2009. following 6. The company has introduced Chicken Selects made from chicken breast in response to the increased consumer proclivity for white meat in recent years.800 restaurants. Strong balance sheet management: The company is also focused on cost-control initiatives.834 operated by developmental licensees).997 are operated by affiliates (primarily in Japan). The chain has also successfully introduced a large number of healthier menu items such as salads. growing brand loyalty and innovating new menu items and marketing campaigns. In August 2007. and the company operates 6.690 restaurants. Developmental License Strategy: The company continues to pursue a developmental license strategy in countries where there is limited upside relative to risk. The U. management expects to return approximately $15 billion to $17 billion to shareholders through dividends and share repurchases. the company sold its Boston Market chain to Sun Capital Partners. McDonald s aims to sustain growth by increasing restaurant visits.K. Europe. now offered in 12. the U.. This would benefit both customers and shareholders. Under this plan. MCD derived 73% of sales from owned restaurants. respectively account for approximately 35%. Strong same-store sales continue: McDonald s continues to report strong 6. Japan (a 50%-owned affiliate). France. the company divested its entire ownership in Chipotle Mexican Grill. intended to expand the breakfast and afternoon dayparts. After Zacks Investment Research Page 2 www. These markets are intended to transition to a developmental license structure. Middle East and Africa). the company sold its minority ownership interest in the United Kingdom-based Pret-AManger for $229. Germany.8% for FY2007 and FY5. the Oak Brook. and pursue share repurchases. China and Japan collectively account for nearly 50% of APMEA s revenue. the company has identified markets typified by primarily company-operated restaurants in Latin America and APMEA (Asia/Pacific. China.KEY POINTS Menu additions drive sales growth: McDonald s has increased the variety of choices on its menu to cater to changing customer tastes and dietary inclinations. Illinois-based McDonald s Corporation (MCD) is a leading fast food chain operating 31. Operations The company s revitalization initiative the Plan to Win program which started in April 2003 continues to spur the growth momentum.S.S. rollout has been very successful and the company plans this year to introduce a cappuccino bar in many of its stores. Plan to Win Turns Around U.1% same-store sales growth for 2Q08. and APMEA . Australia. 3. Canada. Of the total number of restaurants. In 2007. Brazil.802 are operated by franchisees (including 2.4 million. 20.7% for 2006. and apple slices.489 restaurants in over 118 countries as on June 30. OVERVIEW Founded in 1955. distribute dividends.1 million that will be reflected in 2Q08. priced below Starbucks..S. leveraging G&A expenses. Germany and the United Kingdom collectively account for roughly 60% of Europe s revenue. France. and using the cash generated from operations to retire debt. 2008. The company mainly operates and franchises quick-service restaurants (QSRs) under the McDonald s brand. During 2006. resulting in a non-operating gain of about $160. McDonald s major markets are Australia. It would also take advantage of local entrepreneurs. 39% and 16% of total revenue. Europe. In early April 2008. granola and yogurt. and the U. and 27% through fees from franchised and affiliated restaurants. The premium coffee.

in our opinion. In September 2007. However. In 3Q07.000 to 1. to pay an initial franchise fee for each new restaurant opened. McDonald s has about 1. operations in 3Q08 by 120 basis points. McDonald s returned $11. a less capital-intensive business and a steady growth of royalties. and in Canada it is 69%. in the U. Re-franchising provides second EPS growth engine Re-franchising a large chunk of its system will provide another engine of EPS growth and ROE expansion. Potential margin improvement in AMPEA an engine for next phase of EPS growth The next leg of improvement should come from APMEA. and Canada to the developmental license structure. Venezuela and 13 other countries in Latin America and the Caribbean with a developmental licensee organization led by Woods Staton. which are intended to transition to a developmental license structure.S. the company announced its intention to return $15 billion to $17 billion to shareholders as dividend. 2007 through September 30. the U. The company has identified markets where about 2. Over the long term. in our opinion. Return of capital to shareholders a third EPS growth engine The company is focused on leveraging its G&A expenses (down 3% in constant currencies) through costcontrol initiatives and using the cash generated from operations to retire debt. Consequently. This would benefit both customers and shareholders. as the company reduces its capital requirements. These are primarily company-operated restaurants in Latin America and APMEA.K. which has potential for continued rapid growth.K.S. in our opinion.4 billion to . and we expect this proportion to grow as the company implements plans to re-franchise 1. and to commit specified annual capital expenditure for existing restaurants. As part of this transaction. At June 30. and pursue share repurchases. Zacks Investment Research Page 3 www. Argentina.. the company completed the franchising of nearly 1. In addition. The company expects a 100 basis point increase in return on assets. 2008. China will.600 existing restaurants under its Latam transaction in Brazil.300 restaurants operate. which are lower than the U. following a 50% increase last year.7% in 3Q08. Mexico. However. This is nearly double that of the $8 billion the company returned between 2004 and 2006. U.000 stores in China. From January 1. The company continues to raise its dividend. while improving restaurant margins. provide the division s growth engine for years to come.9% in 2002 to 18. McDonald s received $700 million in cash from the sale of these operations coupled with a 20-year license arrangement that requires Woods Staton to pay monthly royalties of 5% of sales to commit to adding approximately 150 new McDonald s restaurants in the first three years. a McDonald s licensee for more than 20 years. this year by 33%. 79% of company s restaurants worldwide are franchised versus 74% at the end of 2006. The proceeds from the deal will enhance shareholder value through increased dividends and share repurchases.500 companyoperated restaurants by the end of 2010. and through share repurchases from 2007 through 2009. Puerto Rico.expanding company-owned store operating margins from 13. franchise restaurants now represent 51% of ownership mix. 2008. the company began the process of transition in smaller markets in Central Europe. It would also take advantage of local entrepreneurs. growth potential still exists as the company takes share from expensive coffee chains and benefits during the recession from consumers trading-down from casual dining restaurants. The company continues to pursue a developmental license strategy in countries where there is a limited upside relative to risk. Currently. we think the domestic margin improvement has been fully achieved. China s quick service market is growing at a mid-teens rate and we expect the company s growth there to mirror that rate. distribute dividends. less than one-third of Yum! Brands China stores. INDUSTRY OUTLOOK Demographics are expected to continue to favor the restaurant industry for some time to come with lifestyle changes. fierce competition among QSRs has challenged margins and profits. management aims at increasing its number of franchises and having less than 25% of its units directly under the company.

INDUSTRY POSITION The quick-service restaurant segment is highly competitive.8%. taking share from grocery . Moreover. Top 5 Public Companies in the Ticker MCD YUM SBUX DRI EAT Company McDonald s Corporation Yum! Brands Inc. have traded down. McDonald s competes with other restaurant chains primarily in terms of quality.83 per share reported in 3Q07.S. Europe +8. Zacks Investment Research Page 4 www. +4. APMEA +7.zacks. Global comparable sales rose 7. comparable sales for the quarter increased: U. such as McDonald s. coupled with rising gas prices and mortgage rates. In line with industry trends. McDonald s Corporation (MCD) reported 3Q08 financial results. time-strapped consumers are eating more outside their homes. and the perception of value of the products offered. dollar s weakness. variety. Starbucks Corporation Darden Restaurant Brinker Intl industry Zacks Rec Buy Buy Sell Hold Hold Market Share 24% 11% 10% 7% 4% RECENT NEWS Third Quarter 2008 Financial Results: On October 22. we favor restaurant companies. seem to have attracted customers back to QSR from casual dining. The company has effectively followed and integrated competitors success in promotions such as valuemenus.although recent menu innovation.05 in 3Q08 compared to $0.7%.05 from $0. McDonald s has been particularly successful with its effective marketing and new product development. EPS rose 18% to $1. By region.S.1% in 3Q08. squeezed by rising gas prices and mortgage rates. Longer-term. Given the U. 2008. although over the last 12 months it has gained share from the more expensive casual dining segment as consumers. the revitalization plan launched in 2003 has laid the foundation for current and future success and has driven double-digit increase in recent quarters. The current I m Lovin It advertising campaign has been widely praised for promoting the brand image. On a GAAP basis.2%. McDonald s 3Q08 EPS from continuing operations increased 27% year over year (22% in constant currency) to $1.89 in 3Q07. that derive a majority of their revenue overseas. McDonald s Corporation increased menu prices by little over 4% but the company believes the increase has not affected its number of guests.

Australia and China led the growth.zacks.000 McDonald s restaurants in 2008. and chicken costs to rise 5% to 6%. beef costs rose 4% and chicken increased 6%. In Europe. In our opinion. We expect food cost increases to decelerate in 2009.2%. For the full year. From January 1..0%. In the U.S. In Europe. management anticipates U. This follows a 50% dividend increase in September 2007. China will provide a strong engine of growth for McDonald s in coming years. This is nearly double that of $8 billion the company returned from 2004 through 2006. announced that one of its affiliates has acquired Boston Zacks Investment Research Page 5 www. Yum! Brands profitable growth in the Chinese market. the sale of Boston Market. beef costs to be up 8% to 9%. 2007. cheese costs to be up 21%. as the global recession has begun to spark commodity deflation. driven by a global comparable sales increase of 7. For 3Q08.2% in 3Q08.00 per share. with the balance used to build new restaurants. 2008.856 million. and chicken costs are expected to increase 7% to 8% in 2008. Africa) Franchise margin as a percentage of revenue increased 60 basis points to 82. a non-core business unit of McDonald's Corporation was completed. the highest level since 1994. comps jumped 8. McDonald's announced that the company plans to open a minimum of 125 restaurants in 2008. the company announced that it intended to return $15 billion to $17 billion to shareholders by way of dividends and share repurchase from 2007 through . Sales of company-operated restaurants grew 3% to $4. MCD to open 150 restaurants in China: On January 29. Franchise margin dollars grew 11% in constant currencies.Revenue for the reported quarter increased 3% year over year to $6. 2007 through September 30. and operating margins expanded 50 basis points to 20.7% in 3Q08. The company is on track to open 150 restaurants in China in 2008. driven by strong comp sales in all geographic segments and by refranchising. We expect prices to decline overall in 2009. This compares very favorably with a 12% rise in the food component of the PPI (producer price index). Capex Spending: The company anticipates cap ex of $2 billion for 2008. and those of franchised and affiliated restaurants jumped 14% to $1. In AMPEA. McDonald s returned $11.267 million. Middle East.S.4 billion to shareholders. contributing to an overall rise of 7% in the U. company operating margins grew 120 basis points to 17% -. In September 2007. equating to a 17% growth rate.S. comps grew 4. albeit off a small base China accounts for just 3. and about 150 in 2009 in China. Dividend & Share Repurchase: The company increased the annual dividend by 33% to $2. comps surged 7. Sun Capital Partners. business dipped just 20 basis points to 18.8%. Sale of Boston Market: On August 27. basket of goods.7%.. nearly half for existing restaurants. Commodities outlook for 2008: For 2008. where it now generates 30% of its earnings. a leading private investment firm specializing in leveraged buyouts and investments in market-leading companies.S.1%. as the global recession has begun to spark commodity deflation. demonstrates the country s appetite for Western fast food. Consolidated operating margin increased 40 basis points to 18. despite rapidly rising commodity costs. The company expects to open about 1.5% of McDonald s earnings.9%. driven by AMPEA (Asia.411 million.their highest level in eight years. Pacific. beef costs are expected to be up 8% to 9%. with beef up 8% and chicken up 6%.S. management expects food costs to rise 7% in the U. 2008. while operating margin in the U. cheese costs up by 25%.

Rising food costs may impact restaurant margins and net income in the near future. quality. Capital World Investors (4. The company operates in a highly competitive environment. INSIDER TRADING AND OWNERSHIP There have not been any significant insider transactions in the past three months. and accessibility. Zacks Investment Research Page 6 www. Boston Market s net loss for the 3Q07 was $1. The transformation will likely be challenging for the company.S. In addition. beef costs are expected to be up 8% to 9%.Market Corporation. State Street Global Advisors (4.4%). the company received net proceeds of approximately $250 million. Management anticipates U. and chicken costs are expected to increase 7% to 8% in 2008. beef costs to be up 8% to 9%. The institutional investors with the largest share holdings are Marsico Capital Management (6. and recorded a gain of $68. RISKS McDonald s is attempting an image shift by introducing more health conscious food in its menu. which is sensitive to price. From the .1 million. In Europe.zacks.7%). cheese costs to be up 25%.6 million after tax.8%). cheese costs to be up 21%.0%) and Fidelity Management & Research (3. and chicken costs to rise 5% to 6%. Institutional investors currently own 72% of McDonald s shares.

5%.S. directly or indirectly. Sell .zacks. SellZacks expects the company will under perform the broader U.68.S. Zacks uses the following rating system for the securities it covers.4%. Any opinions expressed herein are subject to change.Zacks expects that the subject company will outperform the broader U.Zacks expects that the company will perform in line with the broader U. Data is as of midnight on the business day immediately prior to this publication. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. but is not guaranteed as to accuracy and does not purport to be complete. Zacks Investment Research Page 7 www. Buy. the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Equity market over the next one to two quarters. Zacks or its officers.6%. Hold. or will be. Because of individual objectives.24.HISTORICAL ZACKS RECOMMENDATIONS DISCLOSURES The analysts contributing to this report do not hold any shares of MCD.S. equity market over the next one to two quarters. This report is based on data obtained from sources we believe to be reliable. Zacks EPS and revenue forecasts are not consensus forecasts. employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks certifies that no part of the analysts compensation was. is. the report should not be construed as advice designed to meet the particular investment needs of any investor. equity market over the next one to two quarters. Additionally. The current distribution of Zacks Ratings is as follows on the 1076 companies covered: Buy. Hold.