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McDonald’s – Good Company but Overvalued

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This is an introduction to my McDonald's (MCD) stock analysis which is based on Q1 2018 results and projections for FY2018. MCD has experienced significant price fluctuation subsequent to the last week of January 2018. I currently view MCD as overvalued.

Summary

  • MCD has significantly re-energized its business in the last few years under new leadership.
  • The refranchising strategy has yielded significant cost savings to date.
  • I am bullish on MCD but view it as being currently overvalued at ~$164. I would add to my existing position if it retraces to ~$144.

Introduction

McDonald’s (NYSE: MCD) share price peaked at ~$178 on January 26th and subsequently slipped to ~$148 on March 2nd. Subsequent to this date, MCD’s stock price has experienced wide fluctuations. On April 30th, MCD experienced a ~$9/share spike when it released its Q1 results but pulled back ~$4 on May 1st.

Given that MCD released its Q1 2018 results on April 30th and the fact I have not reviewed it subsequent to my January 24, 2017 article, I thought it would be an opportune time to revisit MCD.

Business Overview

MCD franchises and operates McDonald’s restaurants. Of the 37,241 restaurants in 120 countries as at FYE2017, 34,108 were franchised (21,366 franchised to conventional franchisees, 6,945 licensed to developmental licensees and 5,797 licensed to foreign affiliates primarily in Japan and China) and 3,133 were operated by MCD.

The business is structured into the following segments that combine markets with similar characteristics and opportunities for growth, and reflect how management reviews and evaluates operating performance:

  • U.S. - MCD’s largest segment;
  • International Lead Markets - established markets including Australia, Canada, France, Germany, the U.K. and related markets;
  • High Growth Markets - markets MCD believes have relatively higher restaurant expansion and franchising potential. This includes China, Italy, Korea, the Netherlands, Poland, Russia, Spain, Switzerland and related markets;
  • Foundational Markets & Corporate - the remaining markets in the MCD system, most of which operate under a largely franchised model. Corporate activities are also reported within this segment.

As at FYE2017, the U.S., International Lead Markets and High Growth Markets accounted for 35%, 32% and 24% of total revenues, respectively.

Investors who use stock screeners exclusively to identify investment opportunities would very likely eliminate MCD as a potential investment if one of the ‘screening’ metrics is ‘sales growth past 5 years’. Looking at ‘Total Revenues’ for 2012 – 2017, we see that MCD reported $22.567B in FY2012 and $22.820B in FY2017. These figures would suggest that MCD has been spinning its wheels during this timeframe. This is why it is extremely important to delve into the 10-K reports.

Please click here to read my MCD stock analysis.

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By |May 2nd, 2018|General Investing|Comments Off on McDonald’s – Good Company but Overvalued

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