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How Much Is McDonald's Worth?

http://www.fool.com/investing/dividends-income/2010/09/16/how-much-is-mcdonalds-worth.aspx

Matt Koppenheffer
September 16, 2010

The only time you'll usually find me eating fast food is when I'm on a road trip or stuck longer than I like at an airport. So I can hardly call myself any sort of fast food connoisseur who can say for sure that McDonald's (NYSE: MCD  ) is hands-down the best place to grab quick eats.

I do like to think of myself as a bit of a stock connoisseur, though, and as an investment McDonald's has a heck of a lot going for it. Though the company had a bit of a dip earlier in the decade, it's come back with a vengeance and is seriously delivering for its shareholders lately. And right now, with a 3% dividend, McDonald's stock is one of the many blue chips that's yielding more than 10-year Treasuries.

Shares of McDonald's currently change hands at just less than $75 per share. Is that a good deal? Well, first we need to get an idea of what McDonald's shares are really worth.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how McDonald's stacks up.

Company

Total Enterprise Value /
Trailing Revenue

Price / Forward Earnings

Price / Book Value

Trailing PEG

McDonald's

3.8

16.1

6.1

1.7

Chipotle
(NYSE: CMG  )

3.0

30.5

7.1

1.8

Darden
(NYSE: DRI  )

1.1

13.8

3.4

1.3

Jack in the Box
(Nasdaq: JACK  )

0.7

11.6

2.2

0.9

Starbucks
(Nasdaq: SBUX  )

1.8

18.6

5.4

1.5

Wendy's/Arby's Group
(NYSE: WEN  )

0.9

35.1

0.9

NM

Yum! Brands
(NYSE: YUM  )

2.2

17.9

18.7

1.7

Average

1.6

21.3

6.3

1.4

Source: Capital IQ, a Standard & Poor's company, and Yahoo! Finance. Average excludes McDonald's.

Using each of those averages to back into a stock price for McDonald's, and then taking the average across those results, we can come up with an estimated price-per-share of right around $66. This would suggest that McDonald's shares are a bit pricey right now.

A comparable company analysis like this can sometimes raise as many questions as it answers. For instance, is the entire industry properly valued? A supposedly fairly valued stock in an undervalued industry may actually be an undervalued stock.

Additionally, while these companies are comparable they're certainly not all the same. Starbucks, for instance, does not franchise its coffeehouse concept whereas about a third of McDonald's revenue is highly profitable franchise revenue. Chipotle -- which was actually spun off from McDonald's -- is a much smaller and faster-growing business. Wendy's/Arby's, meanwhile, is in the exact opposite situation of being a company badly in need of a turnaround.

So with all that in mind, it's best to combine comparable company analysis with another valuation technique.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow (DCF) analysis. Basically, this method projects free cash flow over the next ten years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it attempts to predict the future, it can be a fickle beast and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For McDonald's DCF, I used the following assumptions:

2011 Unlevered Free Cash Flow

$4.4 billion

FCF Growth 2010-2014

10.2%

FCF Growth 2014-2019

5.1%

Terminal Growth

3%

Market Equity as a Percentage of Total Capitalization

8