McDonald s Corporation NYSE: MCD

Transcription

1 Student Investment Fund Stock Report McDonald s Corporation Analysts: Heather Gelsinger, Dentin Chapman, Brandon Holle, David Packard Recommendation: Long Term Buy Market Cap: $7. billion Current Price: $6.01 Sector: Consumer Discretionary Dividend Yield: 3.17% 12 month target price: $7.73 Sub Sector: Fast Food Restaurant P/E Ratio: 1.2 Beta: 0.6 HIGHLIGHTS MCD is a consistent value creator, as shown by its ability to deliver year-over-year increasing NOPAT and FCF without growing its stock price above fundamentals. MCD penetrated the coffee industry with the introduction of the McCafé in 200. MCD s lower cost, premium coffee competes with Starbucks and is projected to generate $1 billion in total net sales each year. MCD has an established and expanding presence in high growth, emerging markets. BUSINESS SUMMARY MCD is currently recognized as the world s largest revenuegenerating fast food restaurant, earning over $22 billion in sales during Compared to its major competitors, MCD leads the industry with 7% market share. Also in 2009, MCD earned almost 6% of its total sales in international markets. Operating 32,00 locations in 117 countries allows MCD to leverage brand equity with population growth to increase revenues worldwide. INVESTMENT THESIS Concerns of a sluggish economy in 20 led us to MCD the Student Investment Fund favors large-cap, low beta, defensive stocks that pay above-average dividends. MCD has superior financial stability and has provided shareholders with substantial return on investment including a current dividend yield of 3.17%, the highest in their industry. MCD vigorously grows its fundamental value drivers (Dividends, NOPAT and Free Cash Flow) year-over-year. During the past years of economic decline and uncertainty, MCD's stock price has appreciated %. Consumer Discretionary is the top performing sector since the end of January, outperforming the S&P 00 by roughly % -YEAR RETURNS

2 Macroeconomic Thesis Plan to Win Consumer spending remains weak, unemployment is hovering around %, and real disposable income is decreasing. MCD excels under these conditions by providing high value at a low cost to consumers. In addition, the company's Plan to Win initiatives have positioned it for further increases in market share when the economy improves. MCD is deploying a multi billion dollar reimaging budget featuring menu innovations, space redesign and service enhancements to further upgrade its exemplary global brand. This year, MCD plans to spend $1.2 billion solely on reimaging. Moreover, MCD plans to reimage over % of its locations by the end of MCD has increased menu innovation by adding a premium coffee line, the McCafé, and by catering to consumers who prefer healthier options such as salads, yogurt parfaits and chicken products. MCD has increased service enhancement by offering free WiFi, offering food delivery at certain locations, and staying open 2 hours a day in others. These initiatives have already contributed to year over year revenue growth of.% and global same store sales growth of.2%, and are expected to fuel above average growth for a considerable period of time. International Exposure MCD has diversified its locations by operating over 32,00 restaurants in 117 countries, which decreases the company s exposure to the intensely competitive fast food industry in the United States. Also, MCD serves an average of 60 million consumers each day. This per day figure has increased by $1 million (30%) since 2001 and $2 million over the past year.

3 MCD currently divides its revenues into four segments: the United States, Europe, the APMEA (Asia, Pacific, Middle East, and Africa segment), and other countries (i.e. Canada and Latin America and corporate sales). Almost 6% of MCD sales are derived internationally. MCD focuses both on penetrating emerging markets and expanding in developed markets Sales By Segment The graph to the right shows MCD s established presence in both developed and fast growing emerging markets along with the population growth rates.. The blue shaded zones represent MCD's concerted effort to enter emerging markets, where population is growing faster relative to developed markets. MCD expects to build 1,000 restaurants among all of its regional segments during 20. This strategic move will increase revenue by approximately 2%. We view MCD's efforts to exploit opportunities in these particular markets as a strong positive catalyst, as these areas provide the largest international growth opportunities. Additionally, when an emerging market begins to industrialize, consumers begin to mirror Westerners: they want to purchase Western style products in general, and specifically consume more animal protein. These demographics will benefit MCD and its shareholders as it continues to expand its international presence.

4 Industry Presence Invading Starbucks Territory MCD introduced the McCafé in 200 and increased its premium coffee product line to include frappes, iced coffees, mochas, and lattes in Offering premium coffee products for an average of $2 cheaper is advantageous for MCD they can more easily serve a price sensitive consumer who is focused on value. Additionally, Starbucks currently operates in only 0 countries, compared to MCD's operations in 117 countries. Not only does MCD have an advantage over Starbucks through its appeal to price sensitive consumers, but Starbucks does not compete with MCD in 67 countries. Superior Market Share The fast food industry generated about $160 billion dollars in revenue in When comparing MCD to its main fast food competitors YUM, WEN and BKC, MCD holds a dominant 7% market share Market Share

5 Revenue (millions) Profit Margin Dividend Yield ROIC MCD $22,7 20% 3.2% 22% BKC $2,37 % 1.2% 2% YUM $,36 % 2.0% 33% WEN $3,1 0% 1.2% 1% SBUX $9,77 % 0.0% 12% Within the fast food industry, MCD has the highest revenue, more than doubling the total of its closest competitor (YUM). In addition, MCD s lean cost structure allows for the highest profit margin in the industry. This profit margin allows the company to return more value to its shareholders through dividends, producing the highest dividend yield in the industry and a competitive ROIC. Because MCD has a much larger capital investment than its competitors, earning 22% ROIC on that larger capital base allows them to earn higher economic profits than competitors with higher ROIC but much lower capital investments.

6 Model Assumptions Our valuation analysis for MCD was conducted using conservative modeling assumptions. Our discounted cash flow model estimates MCD s intrinsic value at $7.73 per share for 20, indicating MCD is currently undervalued, even in light of these conservative expectations for its future revenue growth and cost structure. Income Statement Inputs Revenue Growth: Despite having a solid five year historical growth rate of.%, MCD faced revenue growth of 3.3% during In 2009, MCD saw the adverse affects of a weak consumer spending environment, which was exacerbated by lower disposable income during the recession. o Historical Revenue Growth o Forecasted Revenue Growth Cost of Goods Sold: MCD s historical average COGS/Sales expense was 6.9%. For our forecast, we decreased COGS/Sales to 61.0%, which was more in line with 200 and 2009 COGS/Sales of 63.3% and 61.3% respectively. Selling, General & Administrative Expenses: MCD s historical average SG&A/Sales expense was.%. For our forecast, we decreased SG&A/Sales to.0%, which was more in line with 200 and 2009 SG&A/Sales of.0% and 9.% respectively. Share Growth: In September 2007, MCD announced its plan for a $ billion share repurchasing program with no specific expiration date. Therefore, we continued MCD s share growth at 3.0% throughout our forecast which was in line with MCD s five year historical average share growth of 3.%. Diluted Share Growth: As with share growth, we decreased MCD s diluted share growth at the same rate of 3.0% which was in line with MCD s five year historical growth rate of 3.%. Dividend Growth: MCD has a forecasted dividend yield of 3.17%. Our valuation model grows the dividend payments appropriately to maintain a 3.17% dividend yield throughout the forecast period.

7 Balance Sheet Inputs: Cash: MCD s five year historical average Cash/Sales of 11.6% has been on a downtrend over the past three years. In 2007, 200 and 2009 MCD had Cash/Sales of.7%,.%, and 7.9% respectively. Our forecast repeats the current trend with forecasted Cash/Sales of.%. Weighted Average Cost of Capital Assumptions: A WACC of 7.1% was calculated using Short term debt cost of 1.% Long term debt cost of 6.% Cost of Equity: Cost of Equity of 7.0% was calculated using the following inputs o Risk free rate of.2% o Market risk premium of.00% o Beta of 0.6: Conducting a regression analysis of MCD s historical returns compared to the market since 200 yielded a beta of 0.3. To maintain conservatism in our model and allow for reversion to the mean, we increased the beta estimate to 0.6. Long term Horizon Value Growth Rate We applied a long term horizon growth rate of 3% for MCD to maintain a conservative outlook for the company s long term prospects. A long term horizon growth rate of 3% fits with the outlook for US GDP growth.

8 Financial Analysis In the pursuit of a lean cost structure, MCD has franchised 0% of its restaurants (the remaining 20% are operated by the MCD Corporation). This is illustrated through high profitability, strong value creation, and a wide ROIC to WACC spread. ROA and ROE Historical Average Forecasted Average ROA 11.3% 13.1% ROE 23.1% 23.% MCD maintains stable level of returns on assets and equity throughout the forecast. The forecasted ROA average is below the 200 and 2009 ROA values of 1.2% and 1.1% respectively. The forecasted ROE is well below MCD s 200 and 2009 return on equity of 32.2% and 32.% respectively. The reason for the forecasted downtrend in ROE is that the company generates excessive amounts of cash and uses it to pay down long term debt in the forecast. This decreases the equity multiplier throughout the duration of the forecast EPS and DPS growth Historical Average Forecasted Average EPS 1.27% 7.3% DPS 2.07% 6.31% MCD has paid a dividend for 3 consecutive years, increasing it every year to its current value of $0. per quarter ($2.20/yr). Even when compressed to lower rates for the forecast, MCD manages to grow both earnings per share and dividends per share at sustainable levels through 2019.

9 Value Creation Metrics NOPAT and Free Cash Flow (millions) Historical Average Forecasted Average NOPAT $3,2 $,60 FCF $3,920 $,309 Over the past five years, MCD has generated large positive free cash flow. Our forecast has MCD s free cash flow growing at an average annual growth rate of.2%. Historically, MCD has grown its NOPAT at an average rate of 11.33%. Following a slight reduction in NOPAT in 20, we forecast NOPAT to grow at an average yearly growth rate of 3.9%. Economic Value Added In 2009, MCD s EVA was $3.2. Our forecast tightens EVA to $2.0 billion and $2.91 billion in 20 and 2011, respectively. This decrease is due to our conservative modeling assumptions. Market Value Added In 2009, MCD s MVA was $76. billion. For 20, this metric grew to $79.16 billion. MCD s MVA is projected to continue its growth at a yearly rate of 2.% through 2019.

10 Value Spread: ROIC to WACC ROIC Historical average return on invested capital was 16.% for MCD. In 2009, MCD generated their highest return on capital at 21.%. For the forecast, ROIC was squeezed to an average 19.% through WACC Weighted average cost of capital was calculated at 7.1%. As described above, the risk free rate, beta, and market risk premium were increased to maintain conservatism. Value Spread (ROIC to WACC) MCD s historical average value spread was 9.3%. In 2009, MCD value spread was at its peak of 1.7%. MCD forecasted value spread averages 12.3%. Even with a conservative valuation model, MCD displays considerable potential to further increase its value creation beyond our forecasted ROIC WACC spread measure.

11 Financial Stability Altman Z Score Test for Bankruptcy Historically, MCD scored an average of.20, which is well above the safe zone. MCD also scored in the same zone for the forecast with an average Altman Z Score of Piotroski s Financial Fitness Scorecard Historically, MCD scored an average of 9 out of 11. MCD s average score for the forecasted years was also 9 out of 11, which suggests continued financial stability through Other Analyst Recommendations Both Argus and Ned Davis recommend MCD as a Long Term Buy while Standard and Poor s recommends a hold with a three star rating (out of five). Argus Ned Davis Standard and Poor s Long term Buy Long term Buy 3 star rating

12 Recommendation Summary Due to MCD s strong dividend, stable balance sheet, and consistent ability to create shareholder value, we rate MCD as an attractive buy and hold stock for the Student Investment Fund. The purchase of MCD stock would ensure a 3.17% dividend yield for the Student Investment Fund. MCD is in the process of implementing its Plan to Win, which will focus on upgrading the current brand through reimaging, menu innovation, and service enhancement. MCD has plans to reimage 2,000 locations, 1,000 in Europe, 600 in APMEA and 00 in the U.S. in 20. MCD also has plans to open more than 1,000 new restaurants in 20, adding almost 2% to top line revenue. MCD offers a low correlation coefficient to the stocks held in the fund. Excluding the VTI, MCD does not have a correlation coefficient over.9 with any stock held in the fund. MCD stock has returned over % to shareholders in the past years. With a continued ability to grow their net operating profit after tax and free cash flow on a year by year basis, MCD market price has never been able to catch up to the intrinsic value of the firm. Our forecast represents MCD performance in a less than ideal environment. MCD should meet and likely surpass our conservative modeling assumptions making our discounted cash flow price a conservative estimate.

13 MCD Financial Analysis, Page 1 of A B C D E F G H I J K L M N Forecasted income statement items are based on years of historical average ratios unless a value is entered in the Enter Firm Ticker MCD manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. Enter first financial statement year in cell B Average Manual Total revenue 19,117 20,9 22,77 23,22 22,7 Revenue Growth 9.3% 9.1% 3.2% -3.3%.% Cost of goods sold 12,90 13,963 1,1 1,3 13,93 COGS % of Sales 67.7% 66.% 6.3% 63.3% 61.3% 6.9% 61.0% Gross profit 6,177 6,932 7,90,639,792 SG&A expense 2,11 2,296 2,367 2,36 2,23 SG&A % of Sales 11.1% 11.0%.%.0% 9.%.%.0% Research & Development R&D % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Depreciation/Amortization D&A % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Interest expense (income), operating Inc. Exp. Oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-recurring expenses ,77 (9) (116) Exp. Non-rec 0.7% 1.3% 7.% -0.2% -0.% 1.% Other operating expenses Other exp. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating Income 3,9,33 3,79 6,3 6,1 Interest income (expense), non-operating Int. inc. non-oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Gain (loss) on sale of assets Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other income, net 32 (29) (20) (12) (27) Other income, net 0.2% -0.1% -0.1% -0.1% -0.1% 0.0% Income before tax 3,660,1 3,72 6,1 6,7 Income tax 1,02 1,2 1,237 1, 1,936 Tax rate 29.6% 31.0% 3.6% 30.0% 29.% 31.0% Income after tax 2,7 2,66 2,33,313,1 Minority interest Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity in affiliates Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. GAAP adjustment U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net income before extraordinary items 2,7 2,66 2,33,313,1 Extraordinary items, total Extrordinary items Net income 2,602 3, 2,39,313,1 Total adjustments to net income Adjustments to NI Basic weighted average shares 1,260 1,23 1,1 1,127 1,092 Share growth -2.1% -3.7% -.2% -3.1% -3.% -3.0% Basic EPS excluding extraordinary items Basic EPS including extraordinary items Diluted weighted average shares 1,27 1,22 1,212 1,16 1,7 Diluted share growth -1.% -3.2% -.% -3.% -3.% -3.0% Diluted EPS excluding extraordinary items Diluted EPS including extraordinary items Dividends per share -- common stock Gross dividends -- common stock 2 1,217 1,766 1,23 2,236 Dividend growth.%.1% 3.3% 22.6% 27.6% Retained earnings 1,760 2, ,90 2,316 Data Source: Thomson/Reuters values in millions Historical Income Statements Forecasting Percentages

14 MCD Financial Analysis, Page 2 of O P Q R S T U V W X Y Z Dividend Growth (Yield 3.17%) 31.% 3.29%.2% 2.1%.2% 3.02% 2.06% 3.29%.% 3.9% Year-by-year revenue growth 3.0%.00%.0% 6.00%.00%.00%.0%.00% 3.0% 3.00% Forecasted Income Statements -- Years year 20E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E Total revenue 23,1 2,2 2, 27,119 2,7 29,99 31,2 32,9 33,631 3,60 Cost of goods sold 1,360 1,93 1,606 16,3 17,370 1,23 19,09 19,21 20,1 21,131 Gross profit 9,11 9, 9,97,76 11, 11,661 12,1 12,673 13,116 13, SG&A expense 2,3 2, 2, 2,712 2, 2,990 3,12 3,29 3,363 3,6 Research & Development Depreciation/Amortization Interest expense (income), operating Non-recurring expenses Other operating expenses Operating Income 6,399 6,6 6,9 7,372 7,71,12,93,33 9,12 9,16 Interest income (expense), non-operating (61) (607) (607) (62) (62) (620) (9) (62) (16) (6) Gain (loss) on sale of assets Other income, net (11) (11) (11) (12) (13) (13) (1) (1) (1) (1) Income before tax,77 6,037 6,336 6,736 7,3 7,9 7,1,27,611,9 Income tax 1,790 1,72 1,96 2,0 2,202 2,323 2,3 2,60 2,670 2,773 Income after tax 3,9,166,372,67,901,171,3,697,92 6,172 Minority interest Equity in affiliates U.S. GAAP adjustment Net income before extraordinary items 3,9,166,372,67,901,171,3,697,92 6,172 Extraordinary items, total Net income 3,9,166,372,67,901,171,3,697,92 6,172 Total adjustments to net income Basic weighted average shares 1,09 1, Basic EPS excluding extraordinary items Basic EPS including extraordinary items Diluted weighted average shares 1,07 1,02 1, Diluted EPS excluding extraordinary items Diluted EPS including extraordinary items Dividends per share -- common stock Gross dividends -- common stock 2,939 3,03 3,203 3,23 3,6 3,69 3,63 3,763 3,973,11 Retained earnings 1,0 1,130 1,169 1,36 1,36 1,602 1,79 1,93 1,969 2,07

15 MCD Financial Analysis, Page 3 of AA AB AC AD AE AF AG AH AI AJ AK AL AM AN Enter Firm Ticker MCD values in millions Historical Balance Sheets year Average Manual Assets Cash & equivalents,261 2,12 1,91 2,063 1,796 Cash % of Sales 22.3%.2%.7%.% 7.9% 11.6%.% Short term investments ST Invest. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Receivables, total , ,060 Receivables % Sales.2% 3.9%.6%.0%.7%.3% Inventory, total Inventory % of Sales 0.% 0.% 0.% 0.% 0.% 0.6% Prepaid expenses Pre. Exp. % of Sales 3.3% 1.% 1.% 1.7% 2.0% 2.1% Other current assets, total 30 1, Other CA % of Sales 2.0%.7% 0.0% 0.0% 0.0% 2.1% Total Current Assets 6,219,192 3,2 3,1 3,16 Property, plant and equipment (net) 19,73 19,3 20,9 20,2 21,32 Net PPE % of Sales 2.% 93.0% 92.1% 6.1% 9.7% 93.7% Goodwill 1,92 2,07 2,301 2,237 2,2 Goodwill % of Sales.1% 9.9%.1% 9.%.7%.1% Intangibles Intangibles % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Long term investments 1,03 1,03 1,16 1,222 1,213 LT Invest. % of Sales.%.0%.1%.2%.3%.2% Notes receivable -- long term Notes Rec. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other long term assets, total 1,237 1,23 1,367 1,230 1,639 Other LT ass. % Sales 6.%.9% 6.0%.2% 7.2% 6.2% Other assets, total Other assets % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total assets 29,99 2,97 29,392 2,62 30,22 Liabilities and Shareholders' Equity Accounts payable Acc. Payable % Sales 3.% 3.2% 2.7% 2.6% 2.% 3.0% Payable/accrued Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Accrued expenses 1,317 1,60 1,63 1,633 1, Acc. Exp. % of Sales 6.9% 7.0% 7.2% 6.9%.2% 7.2% Notes payable/short term debt 0 1, Notes payable % Sales 2.% 0.0%.9% 0.0% 0.0% 1.6% Current portion of LT debt/capital leases Curr. debt % of Sales 3.% 0.1% 3.% 0.1% 0.1% 1.% Other current liabilities Other curr liab % Sales.% 3.9% 1.1% 1.1% 2.1% 2.6% Total Current Liabilities, 2,92,99 2,3 2,99 Long term debt, total,93,390 7,3,16,60 LT debt % of Sales Deferred income tax 99 1, ,279 Def. inc. tax % Sales.0%.2%.2%.0%.6%.% Minority interest Min. Int. % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other liabilities, total 2 1,09 1,33 1, 1,363 Other liab. % of Sales.%.3%.9% 6.0% 6.0%.% Total Liabilities 1,3 13,16 1,112 1,079 16,191 Preferred stock (redeemable) Preferred stock (unredeemable) Common stock Additonal paid-in capital 2,720 3,,227,600, Retained earnings (accumluated deficit) 23,16 2,6 26,62 2,9 31,271 Treasury stock -- common (,37) (13,2) (16,762) (20,29) (22,) ESOP Debt Guarantee 0 0 (3) (9) (13) Other equity, total (733) (297) 1, Total Shareholders' Equity 1,16 1, 1,20 13,33 1,03 Total Liabilities and Shareholders' Equity 29,99 2,97 29,392 2,62 30,22 Forecasted balance sheet items are based on years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. Forecasting Percentages The model uses the more conservative diluted common shares number for total shares outstanding. Diluted weighted average shares 1,263 1,20 1,16 1,11 1,077 Diluted share growth -.7% -3.2% -.3% -3.% -3.9% Total preferred shares outstanding Preferred share growth

16 MCD Financial Analysis, Page of AO AP AQ AR AS AT AU AV AW AX AY AZ Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 9 Forecasted Balance Sheets -- Years year 20E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E Assets Cash & equivalents 2,001 2,01 2,17 2,30 2,20 2,1 2,66 2,762 2,9 2,9 Short term investments Receivables, total 1,001 1,01 1,0 1,13 1,211 1,271 1,32 1,31 1,30 1,73 Inventory, total Prepaid expenses Other current assets, total Total Current Assets,131,296,9,79,996,26,2,702,901 6,07 Property, plant and equipment (net) 22,07 22,929 23,961 2,399 26,66 2,002 29,262 30,32 31,9 32,3 Goodwill 2,367 2,61 2,72 2,726 2,63 3,006 3,11 3,267 3,31 3,2 Intangibles Long term investments 1,223 1,272 1,329 1,09 1,79 1,3 1,623 1,6 1,77 1,00 Notes receivable -- long term Other long term assets, total 1,1 1,09 1,77 1,671 1,7 1,3 1,926 2,003 2,073 2,13 Other assets, total Total assets 31,21 32,67 33,92 3,96 37,762 39,60 1,3 3,091,600,93 Liabilities and Shareholders' Equity Accounts payable ,00 1,03 Payable/accrued Accrued expenses 1,702 1,770 1,0 1,960 2,0 2,161 2,29 2,39 2,31 2,0 Notes payable/short term debt Current portion of LT debt/capital leases Other current liabilities Total Current Liabilities 3,733 3,2,07,300,1,71,9,13,333,93 Long term debt, total 9,97 9,0 9,,12,131,0 9,62 9,077,319 7,336 Deferred income tax 1,129 1,17 1,227 1,300 1,36 1,3 1,9 1, 1,612 1,661 Minority interest Other liabilities, total 1,299 1,31 1,12 1,96 1,71 1,60 1,72 1,793 1,6 1,911 Total Liabilities 16,139 16,27 16,9 17,221 17,2 17,69 17, 17,1 17,120 16,01 Preferred stock (redeemable) Preferred stock (unredeemable) Common stock Additonal paid-in capital,,,,,,,,,, Retained earnings (accumluated deficit) 32,316 33,7 3,616 3,90 37,16 39,01 0,13 2,77,716 6,773 Treasury stock -- common (22,) (22,) (22,) (22,) (22,) (22,) (22,) (22,) (22,) (22,) ESOP Debt Guarantee (13) (13) (13) (13) (13) (13) (13) (13) (13) (13) Other equity, total Total Shareholders' Equity 1,079 16,2 17,379 1,73 20,179 21,71 23,76 2, 27,0 29,36 Total Liabilities and Shareholders' Equity 31,21 32,67 33,92 3,96 37,762 39,60 1,3 3,091,600,93 Total common shares (diluted) 1, Total preferred shares outstanding AFN (interactive with 3 items below) Adjustment to LT Debt (iterate or use Goal Seek (2.0) (12.1) (6.2) (362.9) (60.2) (7.) (92.7) Issue Common Stock to Fund AFN Set Balance Sheet Cash Lower to Fund AFN

17 MCD Financial Analysis, Page of BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BP 1 Enter Firm Ticker MCD 2 3 values in millions Historical Ratios and Valuation Model Forecasted Ratios and Valuation Model -- Years E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E Liquidity Current Quick Net Working Capital to Total Assets Asset Management Days Sales Outstanding Inventory Turnover Fixed Assets Turnover Total Assets Turnover Debt Management Long-Term Debt to Equity Total Debt to Total Assets Times Interest Earned % 31.6% N/A % 29.0% N/A (0.03) % 2.7% N/A % 3.% N/A % 3.9% N/A % 33.1% % 31.% % 30.2% % 29.3% % 2.0% % 26.% % 2.% % 22.2% % 19.% % 17.1% Profitability Gross Profit Margin 32.3% 33.2% 3.7% 36.7% 3.7% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% 39.0% Operating Profit Margin 20.% 21.2% 17.0% 27.% 30.1% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.2% Net After-Tax Profit Margin 13.% 13.7%.2% 1.3% 20.0% 16.9% 17.0% 17.1% 17.1% 17.2% 17.3% 17.% 17.% 17.7% 17.% Total Assets Turnover Return on Assets.6% 9.9% 7.9% 1.2% 1.1% 12.% 12.% 12.9% 12.9% 13.0% 13.0% 13.1% 13.2% 13.3% 13.% Equity Multiplier Return on Equity 17.0% 1.% 1.3% 32.2% 32.% 26.% 2.7% 2.2% 2.% 2.3% 23.7% 23.1% 22.3% 21.6% 20.9% EPS (using diluted shares, excluding extraordinary items DPS (dividends per share) Free Cash Flow per Share Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- Years E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E NOPAT (net operating profit after tax) 2,06 3,0 2,36,13,799,1,92,799,06,31,60,60 6,09 6,30 6,97 ROIC (return on invested capital) 12.3% 1.0% 11.6% 21.% 21.% 19.% 19.% 19.% 19.% 19.% 19.% 19.% 19.% 19.% 19.% EVA (economic value added) 1,19 1, ,01 3,23 2,799 2,911 3,02 3,22 3,3 3, 3,71 3,63 3,99,11 FCF (free cash flow) N/A,0 1,006,291 3,903 3,63 3,61 3,733 3,601,029,230,,,20,21 Weighted Average Cost of Capital 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% Net Operating Working Capital (NOWC) 3, ,006 1,01 1,072 Operating Long Term Assets 19,73 19,3 20,9 20,2 21,32 22,07 22,929 23,961 2,399 26,66 2,002 29,262 30,32 31,9 32,3 Total Operating Capital 22,77 20,36 21,6 21,7 22,003 22,776 23,67 2,73 26,23 27,0 2,927 30,229 31,3 32,3 33,1 Valuation (in millions where appropriate) -- through year 2019E E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E Long-term Horizon Value Growth Rate (user-supplied) 3.00% PV of Forecasted FCF, discounted at 7.% $,661 $9,7 $9,19 $96,2 $99,17 $2, $6,1 $9,99 $11,19 $11,271 $122,3 $126,66 $130,66 $13,731 $13,773 Value of Non-Operating Assets $,261 $2,12 $1,91 $2,063 $1,796 $2,001 $2,01 $2,17 $2,30 $2,20 $2,1 $2,66 $2,762 $2,9 $2,9 Total Intrinsic Value of the Firm $92,922 $91,603 $96,01 $9,322 $0,93 $, $,266 $112,163 $116,99 $120,691 $12,976 $129,222 $133,26 $137,90 $11,71 Intrinsic Market Value of the Equity $3, $3,213 $,36 $,136 $90,23 $9,20 $9,03 $1,911 $,93 $1,117 $11,66 $119,0 $123,3 $12,77 $133,2 Per Share Intrinsic Value of the Firm $6.9 $66. $72.92 $76.91 $1.6 $7.73 $9.09 $0.3 $.07 $11.0 $12.09 $ $12.69 $12.93 $ MVA (market value added) $6,29 $67,7 $73,0 $7,73 $76,39 $79,161 $1,2 $,32 $7,2 $9,937 $92,6 $9,7 $9,332 $1,267 $,30 Weighted Average Cost of Capital Calculations Capital Asset Pricing Model Item Value Percent Cost Weighted Cost Risk Free Rate.2% ST Debt (from most recent balance sheet) % 1.% 0.00% Beta 0.6 LT Debt (from most recent balance sheet), % 6.% 0.1% Market Risk Prem..00% MV Equity (look up stock's mkt. cap and enter in cell BB3 7, 7.7% 7.0% 6.% Cost of Equity 7.0% Weighted Average Cost of Capital 7.% NOPAT per Share EVA per Share MVA per Share

18 MCD Financial Analysis, Page 6 of BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year end stock prices and enter them in the first (historical) years of the "per share value" category Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG7 BP7. 3. Market capitalization will be calculated as basic weighted shares x historical year end prices and then forecasted basic weighted shares x DCF forecasted prices.. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values Historical Ratios and Valuation Forecasted Ratios and Valuation 13 Inputs E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E 1 Per share value (hist. & DCF est.) $33.72 $.33 $.91 $62.19 $62. $7.73 $9.09 $0.3 $.07 $11.0 $12.09 $ $12.69 $12.93 $ Market capitalization $2,01 $,703 $70,003 $70,063 $6,197 $92,97 $96,6 $0,12 $,99 $,60 $112,9 $117,20 $122,13 $126,90 $132,00 16 EBITDA $3,6 $,33 $3,632 $6,1 $6,7 $6,39 $6,6 $6,93 $7,360 $7,72 $,11 $,79 $,19 $9,127 $9,01 17 Enterprise Value $7,71 $60,96 $76, $7,16 $76,961 $1,291 $,39 $,90 $112,70 $116,79 $120,6 $12,932 $12,96 $132,96 $136, Multiples Price/Sales Price/EBITDA Price/Free Cash Flow N/A Enterprise Value/EBITDA Price/Earnings Free Cash Flow Yield 9.9% 1.% 7.%.6% 3.9% 3.% 3.7% 3.% 3.7% 3.7% 3.% 3.9%.0%.1% 2 Dividend Yield 1.96% 2.19% 2.7% 2.6% 3.23% 3.16% 3.1% 3.19% 3.1% 3.19% 3.16% 3.% 3.0% 3.13% 3.12% 26 Historical Override Forecasted Stock Prices Based on Historical Multiples -- Years 27 Valuation Estimates Based On: Average w/manual 20E 2011E 2012E 2013E 201E 201E 2016E 2017E 201E 2019E 2 Price/Sales 2.7 $60. $6.27 $70.32 $76. $3.1 $90.0 $97.01 $.01 $1.9 $ Price/EBITDA 12.0 $77.21 $2.7 $9.1 $97.6 $.9 $11.20 $ $ $10.7 $ Price/Free Cash Flow 2.61 $9.37 $2.7 $7.13 $6.6 $ $ $17.7 $163.2 $179.3 $ Enterprise Value/EBITDA 1.2 $. $92.0 $99.16 $.36 $ $ $136.7 $16.6 $16. $ Price/Earnings $73.9 $79.71 $6.2 $9.1 $2.7 $ $ $130.7 $10.71 $.6 33 Low Price $60. $6.27 $70.32 $76. $3.1 $90.0 $97.01 $.01 $1.9 $ High Price $9.37 $2.7 $7.13 $.36 $ $ $17.7 $163.2 $179.3 $ DCF Price $7.73 $9.09 $0.3 $.07 $11.0 $12.09 $ $12.69 $12.93 $ Price/Sales and Enterprise Value/EBITDA vs. Price Forecasted Per Share Stock Values 39 2 $ $2 0 $19 $ $ $16 2 $10 $ 3 16 $120 $13 $ $0 $ $90 6 $0 $7 7 $60 $60 $ 9 $0 $30 $1 0 0 $20 $ Price/Sales Enterprise Value/EBITDA Historical or DCF Price Low Price DCF Price High Price P/S and Ent. Value/EBITDA Historical or DCF Price Forecasted Value Per Share

19 MCD Financial Analysis, Page 7 of CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB Price/Earnings Ratio Gross Margin Economic Value Added % 0% 3% 30% 2% 20% 1% % % 0% $,00 $,000 $3,00 $3,000 $2,00 Price/Earnings Ratio and Dividend Yield Price/Earnings Ratio Dividend Yield Gross, Operating and Net Profit Margins Gross Margin Operating Margin Net Margin Economic Value Added & Market Value Added (millions) Economic Value Added Market Value Added.0%.0% 3.0% 2.0% 1.0% 0.0% $120,000 $0,000 $0,000 $60,000 Dividend Yield Market Value Added EPS and DPS ROA, ROE and ROIC NOPAT and Free Cash Flow $.00 $7.00 $6.00 $.00 $.00 $3.00 $2.00 $1.00 $0.00 3% 30% 2% 20% 1% % % 0% $7,000 $6,000 $,000 $,000 $3,000 $2,000 $1,000 Return on Assets, Equity and Invested Capital Return on Assets Return on Equity Return on Invested Capital $0 Earnings and Dividends Per Share Earnings Per Share NOPAT and Free Cash Flow (millions) NOPAT Dividends Per Share Free Cash Flow

20 MCD Financial Analysis, Page of DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV Piotroski Score Altman Z Score Piotroski Financial Fitness Score (max = 11) Piotroski Score Altman Probability of Bankruptcy Z Score Z >2.9 = Safe, 1.23 < Z < 2.9 = Grey Area, Z < 1.23 = Distress Altman Z Score