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
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
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: