Monday, December 3, 2007

* Stock Analysis: MCD

Linked here is a PDF copy of my detailed analysis of McDonald's - Corp. (MCD) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: McDonald's Corporation primarily franchises and operates McDonald's restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. MCD is trading at a discount to only one of the four valuations listed above. If I exclude the high and low valuation, and average the remaining two valuations, MCD is trading at a whopping 58.4% premium. MCD has a Star deducted for trading in excess of 5% of its calculated fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. MCD nearly hit a grand-slam home run in this section earning Stars for the first four items above. However, since MCD's payout percentage increased more than 15 basis points (15%) above its historical average, a Star is deducted. Even with an 18 basis point increase, the current payout percentage of 43% is nothing to be alarmed about. In total MCD earns a net of three Stars in this section.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. MCD earned a Star for 1.) above.

Other: I'm lovin' MCD's Dividend Analytical Data and its Dividend vs. MMA metrics, but from a fair value standpoint, its currently priced like a 5-Star restaurant. It is also important to note MCD only pays a dividend once a year in December. This leaves a lot of time for investors to speculate on the current year's dividend.

Conclusion: MCD had one Star deducted in the Fair Value section, a net of three Stars added in the Dividend Analytical Data section and one Star added in the Dividend Income vs. MMA section for a net total of Three Stars which rates it as a 3-Star Hold. I'm on the sidelines for now, but watching closely.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of MCD.
What are your thoughts on MCD?

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