McDonald Stock valuation

With an EPS of 2.95, McDonald’s stock seems to be an attractive investment.

4. Price Earning (P/E) Ratio: The P/E ratio is equal to a stock’s market capitalization divided by its after-tax earnings over a 12-month period. It is the most common measure of how expensive a stock is. The value is the same whether the calculation is done for the whole company or on a per-share basis. A higher P/E ratio implies that the market is willing to pay more for each dollar of annual earnings and is more likely to be considered as more risky investments than the stock with low P/E ratio because a high P/E ratio signifies high expectations. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the market price. Comparing P/E ratios is most valuable for companies within the same industry. Companies with negative earnings does not have P/E ratio at all. P/E ratio of McDonald’s is 16.60. It means that to earn $1 earnings from this stock the investor has to buy the stock at $16.60. The PE ratio in this case is not very high and the company is not at a high risk.

5. Price Earnings to Growth Ratio: A stock's price/earnings ratio divided by its year-over-year earnings growth rate. A low PEG ratio signifies a better value because investors will be paying less for each unit of earnings growth. The PEG Ratio of McDonald’s Corp, is 2.16 times. Since this ratio is not too high the company’s growth is assured.

6. Price to Cash Flow: A stock's capitalization divided by its cash flow for the latest fiscal year. Cash flow is defined as net income plus Depreciation and Amortization. It is harder to manipulate. Since cash flow is higher than earnings, P/CF ratio will be lower than P/E ratio. The value is the same whether the calculation is done for the whole company or on a per-share basis.

The Price to cash flow for McDonald’s Corp. is 16.68, the same as P/E ratio because; the company did not recognize any Depreciation or Amortization expenses.

7. Price to Free Cash Flow: Free cash flow is defined as Cash Flow reduced by normalized capital expenditure and preferred stock dividend (CF–Cap X – Preferred stock dividends). Free cash flow is the cash left over for the common share holders. The Price to Free Cash Flow ratio is always equal to or higher than the Price to Cash flow ratio. In this case there is no preferred stock.

The Price to Free Cash Flow for McDonald’s Corp, is 15.10.

8. Price to Book Value: Price to book value implies how aggressively a stock is being priced in the market. Price-to-book Ratio = Market price of common stock / Book value. A price-to-book ratio of more than 1.0 for stocks is common, which means that the stock is selling for more than its book value. It is possible that a stock being traded at three to five times its book value in a strong market. Investors generally look for a price to book value of around 1.0 in order to consider a stock as reasonably priced.

Price to Book Value of McDonald’s Corp, is 3.83

9. Enterprise value / EBITDA Analysis: Enterprise value is equal to company's market capitalization + face value of the debt. EV/EBIDTA measures the markets expectations of to what extent the companies operations are worth. A low ratio indicates that a company might be undervalued. Since EBITDA eliminates the effects of financing and accounting decisions, it can be used to analyze the profitability between companies and industries. This ratio can vary depending on the industry. Therefore, it's important to compare the multiple to other companies or to the industry in general. We generally expect higher EV/EBITDA in high growth industries and lower multiples in industries with slow growth. EV/EBIDTA for McDonald’s Corp is 10.714

Analysis of S.E.C. Filings and Shareholder Information

In the company’s 10K statement Mc Donald’s has stated that they face risks such as adapting their business model in particular markets. Mc Donald’s faces risks in many countries because they do not fully own their restaurants and they stated that this might affect the way they operate due to regulatory rules around the world. A major risk that this company faces is also that the world has become more aware of nutritional values of food and expects a great deal of freshness and healthy prepared food. This is becoming challenging for Mc Donald’s since they are known to be an unhealthy food distributor.  The company’s dividend payments have increased over the years they reported paying $1.00 in 2006 up from .67 in 2005 and .55 in 2004. Their stock price also increased in 2006 to $#44.33 up from $33.72 in 2005 and $32.06 in 2004.

In the 10 Q statement the company reported that approximately 2,300 restaurants in 2005 represented $2.5 billion in sales. However the expenses and losses amounted to; $150 million in selling, mainly from the general & administrative expenses, operating loss $21 million, capital expenditures of $100 million and slightly negative free cash flow. In order to change this and turn around the situation, Mc Donald’s wants to sell these restaurants to a single licensee.  The 2,300 restaurants are currently operated by the company and represent a 3 billion dollar investment this suggests that $800 million in accumulated currency losses are reflected in shareholders’ equity. In October 2001Mc Donald’s announced $5.0 billion share repurchase program with no specified expiration date. In March 2006, the Company’s Board of Directors authorized an additional $5.0 billion to this share repurchase program, for a total of $10.0 billion.

In the company’s proxy statement the company stated that their directors must acquire common stock or common stock equivalent units equal 10,000 shares. This shows how the company wants its directors to have a stake in the company so that they can work harder and better to make the company more profitable. The proxy statement also shows that the largest single common stock holders are AXA with common shares   of 70,644,490 which amount to 5.7 % and Dodge & Cox with common shares    of 67,966,771 which amount to 5.5 %. 

McDonald’s Corp. Common Stock Recommendation:

After analyzing McDonald’s annual report for the year 2006 and the ratios we have come to the conclusion that investment in this stock is beneficial. The recommendation is based on following judgments and facts which come out from the company’s financial statements and Quarterly report.

1. The operational profit of the company is steadily increasing and the expenses are under control.

2. McDonald’s Corp has an impressive financial status, since the company relies less on debts, it saves interest expenditure and is in a better position to get loans from the financial institutions in case they plan to expand their operations.

3. McDonald’s has shown a great ability to increase its net earnings and the quarterly reports indicate the same.

4. As the proxy statement indicates, McDonald’s Corp, wants its directors to have ownership interest in the company so that they can work harder and better to make the company more profitable.

5. The main reason why we recommend investing in this company is because of its stable growth. We believe that it is likely that the price of the stock will increase because of the fact that McDonald’s board authorized a stock buy back amounting to $10 Billion.

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