McDonald’s (MCD)
Fundamental analysis of McDonald’s (MCD), June 24, 2017
Description:
McDonald’s is not a small-cap stock, but nevertheless a value proposition that fits into this article.
The company is one of the world’s leading fast food chains with more than 36,000 restaurants around the world.
Valuation:
McDonald’s is not cheap at 28.4 times earnings. Average earnings of the past three years come in at 5.02 which gives a P/E ratio of 30.8. Because of the high Goodwill, the Book value is negative. The company has $1.4 billion in Working capital which means that it is able to pay its short-term bills.
Balance sheet:
The company has a negative equity which in theory means that a shareholder owes money to creditors if the company goes bankrupt. This does not look good.
Free cash flow and dividend:
McDonald’s has a Free cash flow of $4.2bn which allows the company to pay out a nice dividend of $3.61 per share. Furthermore, the company is part of the Dividend Aristocrats which means that they have paid out uninterrupted and increasing dividends over the past 20 years. The dividend yield, on the other hand, is low at 2.3%.
Conclusion:
At $154.64 the McDonald’s stock is too expensive for me.
Update: July 26, 2017
McDonald’s had an earnings call yesterday and even if they had a reduction in sales last quarter compared to the same quarter last year of 3.5 per cent, they managed to increase their earnings per share by 30 per cent. The current earnings per share is $1.70.
The current P/E ratio is still very high at 28.9 with a forward P/E ratio of 26.2. The Book value is negative due to the high proportion of intangible assets.
If you buy the stock now, you believe that their earnings will continue to grow indefinitely.
It doesn’t make sense to buy McDonald’s stock at these prices.
Update: September 6, 2017
McDonald’s is marginally more expensive since the last update. The company is now valued at 29.2 times 2016 earnings. The price over the average three years’ earnings is 31.7 which is way too much.
To be a serious buyer of the company I would like to see prices drop with at least 50 per cent.
McDonald’s update: January 18, 2018
Since we last visited McDonald’s, the stock has gone up a further 17 per cent. That is only to say that the general market is too expensive and that it will end badly.
To buy the McDonald’s stock you are now paying 32 times 2016’s earnings which is ridiculously expensive.
Of course the company is seeing this and adjusting the dividend accordingly, the dividend yield is now 2.1 per cent, but for a good investment what is needed is low valuations.
This stock is not among them.
Conclusion:
The stock is too expensive for my taste.