Investment Analysis of McDonald's using DDM, DCF and Comparable Method
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This presentation provides an investment analysis of McDonald's using Dividend Discount Model (DDM), Discounted Cash Flow (DCF) Model and Comparable Method. It includes company background, advantages of each method, and comparison with peers.
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Good company to invest in – Once the company has adequate funds thenextthingisdecidingaboutthe company in which to invest the funds. Toanalyseanycompanybefore investing,itsbackground,financial dealings, management type and various otherthingsarerequiredtobe considered.
Company background – McDonald’s is the fast food company limited by service restaurant that has morethan35000restaurantsover more than 100 nations. It serves more than 75 million customers each day withhavingmorethan4million employees.
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Dividend discount model (DDM) – DDM is used for valuing the stocks that uses the theory that the worth ofastockissumofallthefuture dividends. Using the cost of capital, stock price and next year’s value of dividendtheintrinsicvalueofthe stock can be determined.
Major advantage of DDM model is that is is most widely used method for computing the share prices and thereforeiseasiestmethodto understand.Itisusedforvaluing thestockofthecompanywithout consideringthemarketconditions. Hence, it is easier to compare the entities of different sizes and from different industries.
Discounted cash flow model (DCF) DCFmodelisparticulartypeofthe financial model that is used for valuing the business.Itissimplytheforecastof entity’sunleveredfreecashflowthatis discounted back to present value. DCF is processofcomputingpresentvalueof investment’s future cash flows for arriving at estimation of current fair value. DCF=CF1/(1+r)1+CF2/(1+r)2+ CF3/(1+r)3...+ CFn/(1+r)n
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Main advantages of DCF method is that isoffersclosestestimateforthe intrinsicvalueofastock.Itis considered as most appropriate method forvaluationifanalystisconfident abouttheassumption.Further,unlike the other valuation DCF depends on the freecashflowthatisconsideredas reliableforestimatingthesubjective policies for accounting.
Comparable method Comparableanalysisprocessisused forevaluatingthecompany’svalue throughusingmetricsoftheother businesses of the similar size from the sameindustry.Itisdoneonthe assumptionthatthesimilarentities will have same valuation multiples like Price earnings ratio.
The main advantage of this method is that it can be used for comparing the peersfromthesameindustry. Further, it is easier to understand and itusesfewerassumptionsas compared to other methods like DCF. Further, it captures the present mood of the market.
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Discounted cash flow model (DCF) Weighted average cost of capital WACC = 82% * 9.1% + 18% * 2.06% = 7.84%
Comparable method The benchmark – Starbucks Corporation– the company was incorporated on 4thNovember 1985. It is a marketer, roster and retailer of the coffee. It roasts and purchases coffee that is sold by it along with the tea, handcrafted coffee, wide range of the fresh foods and different types of beverages.
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Compass group PLC– It is leading food and support service entity in the world that can be traced back for more than 60 pastyears.Itisspecialisedinoffering food and wide range of support services all over the business and industry sector ofhealthcareandseniors,defence, education, remote and offshore.
Yumbrands– As the restaurant company Yum brands put faces of the people around andsatisfiesitscustomerseachtimethey eat the foods and does it better as compared tootherrestaurantcompany.Itisthe largestquickservicerestaurantthatis concerned in world with regard to unit terms withmorethan33,000locationsover100 countries.
Price earnings ratio P/Eratioistherelationshipamongthe company’ssharepriceandearningsper share. It gives the idea regarding what the market is willing to pay for the earnings of thecompany.Itisimportantwhilevaluing the stock of company as the investors want to assess how profitable will be the company in future.
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Comparison with peers P/E ratio = Stock price per share / EPS = $ 186.43 / $ 6.43 = 28.99.
Price to sales ratio PS ratio is the relative valuation measure as it is useful only when compared to the PS ratio of the peers. It varies dramatically by the type of industry. For instance, the PS ratio for retail industry is generally high as compared to the companiesfromresearchanddevelopment industry.
PS ratio = Price per share / annual net sales per share =$186.43/ (12718900000/794497880) = 11.6 It can be noticed from the above table that the PS ratio of McDonald is highest among all that is 11.65. Hence, it can be stated that the company is a good choice for the purpose ofinvestment(Corporate.mcdonalds.com, 2018).
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Price to book ratio – It is the financial ratio used for comparing the market value of the stock to the book value of share. It indicates whether the asset value of the company is comparable with the market price of the stock and therefore it can be used for finding the stock’s value. P/B ratio = Stock price / book value per share P/B ratio = $ 186.43 / -4.12 = -45.25
EV/EBITDA ratio – It is used for valuing the company and used withtheP/Eratio.Asitincludesdebt,it givesmuchmoreaccuratevaluationand this is considered as the main advantage of this ratio. EV/EBITDA- Enterprise value (EV) = $ 216.88 billion = $ 21,688 million EBITDA = 13,267.7 million EV/EBITDA = 1.63
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Liquidity metrics – It shows whether the company is able to meet theshorttermliquiditywiththecurrent assets available with it. Generally the ratio of more than 1 indicates that the company has sufficientcurrentassetstopayoffthe current liabilities. Both the current ratio and quick ratio of the company is indicating that the company has sufficient current assets to meet its current obligations.
Result – Dividend discount model – Undervalued Discounted cash flow model – Undervalued Price earnings ratio – Highest among peers Price to sales ratio – Highest among peers Price to book ratio -Undervalued Other ratios - healthy Therefore, it is recommended that the fund shall be invested in McDonald.
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Finance.yahoo.com. (2018). Retrieved 18 December 2018, from https://finance.yahoo.com/quote/MCD/ Corporate.mcdonalds.com. (2018). Retrieved 18 December 2018, from https://corporate.mcdonalds.com/content/dam/gwscorp/investor-relations-content/annual- reports/McDonald%27s%202017%20Annual%20Report.pdf