Generals: McDonald’s Corporation (MCD) Pershing Analysis Update August 2014

McDonalds Corporation

August 25, 2014


SUMMARY INFO

  • NYSE: MCD
  • Recent PPS: $94.50
  • Shares Out: 1 billion
  • Market Cap: $94.5 billion

DISCUSSION

Not much analysis here, more for my own documentation. Started out doing a summary of the most recent 10K, but morphed into attempting to break down the Company into its “Franchise” and “Company-Operated” segments. I had never looked at Pershing’s original valuation of MCD from the 2005 time period, but today was able to find a compilation of Pershing presentations that contained the MCD presentation labeled “A Value Menu for McDonald’s”. I went through and attempted to put 2013 MCD financials into the same framework as Pershing’s 2004 analysis. The driving point of Pershing’s analysis was that MCD’s consolidated financials obfuscated the extremely valuable underlying Franchise/Real Estate company due to how the Company reports the results of its Company-Operated (C-O) restaurant segment. In a nutshell, the Franchise/RE company collects 13% of franchisee revenue in rent & royalties; however, MCD’s C-O segment is not technically charged the 13% rent/royalty fee (I say technically, because if they were charged the 13%, it would wash out in consolidation), thus the C-O segment appears more profitable than if it were a stand-alone franchisee. In 2004, as-reported financials showed the C-O segment generated 46% of consolidated EBITDA…after normalizing the segment’s financials for the 13% rent/royalty charge, however, that percentage drops to 22%. Pershing originally wanted the Company to IPO its “McOpCo” segment in order to highlight the underlying value of the Franchise/RE segment. While the Company did not follow the Pershing blueprint precisely, it did accelerate performance by reinvesting in the store base, selling off C-O restaurants, buying back stock and boosting operating margins. As can be seen in the attached PDF labled “MCD Pershing Analysis Update”, systemwide sales have grown 4.7% per annum the past five years, and EBIT climbed to 31% of revenue from 27% in 2008. With recent results “slipping”, the Company is receiving a growing amount of pressure to turn its operations around in order to boost SSS (I quote “slipping” because systemwide sales were $2.55 million per restaurant in 2013 versus $2.21 in 2008…the “slip” is from $2.6 million in 2012…). With the nearly 100%-franchised Burger King (BKW) firing on all cylinders, I would not be surprised at all if the likes of Pershing, Trian or 3G started poking MCD in the BKW direction in the not-so-distant future. All that to say, I thought it would be an interesting exercise to look at what MCD might be worth on a sum-of-the-parts basis, along the lines of Pershing’s original analysis. Here is a quick summary of how the MCD FranchiseCo looked in 2004 versus today, along with some valuation work on a stand-alone basis and a post-recap basis (please see attached analysis for financial/valuation details).

2004 MCD FranchiseCo

  • Revenue $6.7 billion
  • EBIT $3.3 billion – 49% margin, 82% of Consolidated EBIT
  • EBITDA $4 billion – 61% margin, 78% of Consolidated EBITDA

2013 MCD FranchiseCo

  • Revenue $11.6 billion
  • EBIT $7.4 billion – 64% margin, 88% of Consolidated EBIT
  • EBITDA $8.3 billion – 72% margin, 83% of Consolidated EBITDA

Stand-Alone SOTP Valuation: $122 per share

Post-Recap SOTP Valuation: $134 per share

 

Pershing Presentation Compilation

MCD Pershing Analysis Update August 2014

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