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.


Total Enterprise Value /
Trailing Revenue

Price / Forward Earnings

Price / Book Value

Trailing PEG
















Jack in the Box
(Nasdaq: JACK)





(Nasdaq: SBUX)





Wendy's/Arby's Group





Yum! Brands










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


FCF Growth 2014-2019


Terminal Growth


Market Equity as a Percentage of Total Capitalization


Cost of Equity


Cost of Debt


Weighted Average Cost of Capital


Source: Capital IQ, a Standard & Poor's company, Yahoo! Finance, author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $64 for McDonald's stock. This seems to confirm what we found above -- that McDonald's stock is fairly expensive right now.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well advised to play with the numbers further before making a final decision on McDonald's stock.

That said, the range of $64 to $66 that we got from the two valuation methods seems to say that McDonald's stock is likely overvalued right now. At the midpoint between the two estimates we get $65 -- 13% below today's stock price.

Speaking as a Mickey D's shareholder myself, I don't have a burning desire to sell my shares. It's a solid company that produces attractive returns on its equity, has a very valuable brand, and a strong global presence. Plus, McDonald's is a member of Standard & Poor's "dividend aristocrats" and I can continue to collect that 3% dividend the company is kicking out to me.

Of course, I am always careful to not fall in love with any stock, so as much as I like McDonald's, if the stock continues to run I will start to consider taking advantage of the high valuation and finding a better home for my money.

Do you agree that McDonald's stock is overvalued? Head down to the comments section and share your thoughts.

Even though McDonald's looks a bit overvalued, it's not a scary stock. These, however, might be another story.

Chipotle is a Motley Fool Rule Breakers choice. Starbucks is a Motley Fool Stock Advisor selection. Chipotle is a Motley Fool Hidden Gems selection. Motley Fool Options has recommended writing puts on Jack in the Box. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Chipotle and Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of McDonald's, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.