Is McDonald's Stock a Buy? Let's Crunch the Numbers

McDonald’s (NYSE:MCD) has been a stalwart in the fast-food industry for decades, but is its stock still a bargain? Let’s dive into its latest financials to estimate intrinsic value using the discounted cash flow (DCF) model.

The DCF Playbook: Why Cash Flow Matters

The DCF model values a company by forecasting its free cash flows (FCF) and discounting them back to today’s dollars. The formula is:
Intrinsic Value = Σ (FCF_t / (1 + r)^t) + Terminal Value
Here, r is the discount rate (cost of capital), and t is the time period.

McDonald’s 2024 Financials: A Strong Foundation

Let’s start with the numbers:
- 2024 Free Cash Flow (FCF): $6.67 billion (down 7.9% from 2023’s $7.26 billion but still robust).
- Net Income: $8.22 billion (slightly down due to higher interest and taxes).
- Dividend Growth: 6% increase to $1.77 per share, marking 43 consecutive years of dividend hikes.

Building the DCF Model

Step 1: Project Future Cash Flows
Assume FCF grows at 3% annually for 10 years (conservative given its 2% revenue growth and $30B loyalty sales).

Step 2: Terminal Value
After Year 10, we apply a perpetuity growth rate of 2% (below GDP growth).

Step 3: Discount Rate
Use 8%—a reasonable rate given its stable business and 5.6% beta (slightly more volatile than the market).

The Math: Let’s Calculate

Year	FCF (B)	Discount Factor (8%)	Present Value (B)
2025	6.87	0.926	6.38
2026	7.06	0.857	6.05
2027	7.25	0.794	5.76
2028	7.45	0.735	5.48
2029	7.66	0.681	5.22
2030	7.88	0.63	4.96
2031	8.10	0.583	4.72
2032	8.33	0.540	4.49
2033	8.56	0.502	4.29
2034	8.80	0.466	4.10

Terminal Value (Year 10):
(FCF_{2034} * (1 + 0.02)) / (0.08 - 0.02) = (8.80 * 1.02) / 0.06 ≈ $151.3 billion
Discounted to present: $151.3B * 0.540 ≈ $81.7B

Total Present Value of FCF + Terminal Value ≈ $63.3B + $81.7B = $145B

Per-Share Value:
Divide by 718.3 million shares (2024 average):
$145B / 718.3M ≈ $202/share

Reality Check: Risks and Dividends

• Headwinds: Declining global comparable sales (-0.1% in 2024) and U.S. competition (e.g., Wendy’s, Chick-fil-A).
• Upside: Loyalty programs (175M+ users) and value-driven menu items (e.g., $1 McCafé drinks) could boost sales.
• Dividend Yield: At $1.77/year, the yield is 0.58% (based on recent $306/share price). While modest, the dividend’s growth history offers stability.

Conclusion: A Buy, But Not a Slam Dunk

The DCF suggests intrinsic value of $202/share, significantly below McDonald’s current price of $306/share. Wait—this seems contradictory! What’s the catch?

Ah, the discount rate assumption. If we lower the discount rate to 7% (reflecting its defensive business), the intrinsic value jumps to ~$255/share. Add in strategic moves like expanding plant-based options and digital ordering, and the long-term outlook brightens.

However, McDonald’s valuation is already rich at 25x trailing earnings. For aggressive investors, it’s a “hold” with upside if margins rebound. For dividend seekers, the 0.58% yield pales next to peers like Coca-Cola (2.3%)—so focus on growth instead.

Final Take: McDonald’s is no longer a screaming buy, but its moat and global reach make it a “hold” with potential for 5% annual returns. For the bold, nibble at dips below $280.

Data as of February 2025. Past performance ≠ future results.