Offshore

⁠Dimitry Nakhla | Babylon Capital®
In November 2023 I suggested: “although I’m not a buyer today, I’d consider $MCD closer to $245💵”

As my research indicated, $MCD traded down to $244💵 & then formed a short-term bottom

Here’s more of the analysis for context:

“$MCD has a good track record of meeting analyst estimates 2 years out so let’s still assume $MCD ends 2025 with $13.53 in EPS & see its CAGR potential assuming different multiples

24x P/E: $324.72💵 … ~11.7% CAGR

22x P/E: $297.66💵 … ~7.2% CAGR

20x P/E: $270.60💵 … ~2.5% CAGR

As you can see, $MCD appears to be trading at a fair valuation relative to growth

However it appears that last month (when $MCD shares traded for $248) was the most opportune time to buy shares

At $248, assuming 22x multiple, $MCD CAGR potential was ~11.6%

That’s pretty attractive (and a reasonable assumption) for a stable & quality business like $MCD that is also a real estate company

*** So, although I’m not a buyer today, I’d consider $MCD closer to $245💵 ***”

I will likely provide an updated $MCD analysis in the next couple weeks (if you’d be interested, feel free to comment below so I can prioritize the analysis & if there’s enough interest, I’ll get to it sooner rather than later)

#stocks #investing"

A sober valuation analysis on $MCD 🧘🏽‍♂️

•NTM P/E Ratio: 22.09x
•10-Year Mean: 22.96x

•NTM FCF Yield: 4.62%
•10-Year Mean: 4.08%

As you can see, $MCD appears to be trading slightly below fair value

Going forward, investors can expect to receive ~4% MORE in earnings per share & ~13% MORE in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $MCD is a quality business

BALANCE SHEET✅
•Cash & Equivalents: $3.51B
•Long-Term Debt: $37.35B

$MCD has a decent balance sheet, reflected by its BBB+ S&P Credit Rating & 7x FFO Interest Coverage Ratio

RETURN ON CAPITAL✅
•2018: 33.1%
•2019: 22.0%
•2020: 16.4%
•2021: 21.1%
•2022: 23.1%
•LTM: 24.7%

$MCD has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2017: $22.82B
•2022: $23.18B
•CAGR: 0.31%

$MCD margins have expanded substantially, allowing for more bottom line growth despite flat revenue growth

MARGINS 2017 vs LTM✅
•Gross: 46.5% … 57.2%
•Operating: 36.8% … 46.0%
•Net: 22.8% … 33.3%

FREE CASH FLOW✅
•2017: $3.70B
•2022: $5.49B
•CAGR: 8.21%

NORMALIZED EPS✅
•2017: $6.66
•2022: $10.10
•CAGR: 8.68%

SHARE BUYBACKS✅
•2013 Shares Outstanding: 1.01B
•LTM Shares Outstanding: 0.73B
•Share Decrease: ~38%

By reducing its shares outstanding ~38%, $MCD increased its EPS by ~61% (assuming 0 growth)

PAID DIVIDENDS PER SHARE✅
•2005: $0.67
•2022: $5.66
•CAGR: 13.37%

Lastly, $MCD is a “real estate company” that owns a lot of land (as you can see in the third photo)

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~4% more in EPS & ~13% more in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $MCD has to grow earnings at a 11.05% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2024 - 2025 EPS growth over the next few years to be below the (11.05%) required growth rate

However, this may not be a problem as we’ll see below:

2023E $11.80 (16.8% YoY) FY Dec*

2024E: $12.47 (5.6% YoY)
2025E: $13.53 (8.5% YoY)

$MCD has a good track record of meeting analyst estimates 2 years out so let’s still assume $MCD ends 2025 with $13.53 in EPS & see its CAGR potential assuming different multiples

24x P/E: $324.72💵 … ~11.7% CAGR

22x P/E: $297.66💵 … ~7.2% CAGR

20x P/E: $270.60💵 … ~2.5% CAGR

As you can see, $MCD appears to be trading at a fair valuation relative to growth

However it appears that last month (when $MCD shares traded for $248) was the [...]

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