Calculating The Intrinsic Value Of McDonald's Corporation (NYSE:MCD)

As an investor, you're always on the hunt for undervalued stocks. One way to identify these opportunities is by calculating a company's intrinsic value using the Discounted Cash Flow (DCF) model. Today, we'll walk you through the process of calculating the intrinsic value of McDonald's Corporation (NYSE:MCD) and determine if it's currently undervalued, fairly valued, or overvalued.

Assumptions and Methodology

Before we dive into the calculations, let's outline the key assumptions and methodology used in this analysis:

1. Discount Rate: We'll use a discount rate of 7.4%, which is based on a levered beta of 1.248. This beta is derived from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0.
2. Growth Rates: The DCF model uses a two-stage growth model. In the initial period (2022-2031), the company is expected to have a higher growth rate, with the growth rate slowing down in the second stage (2032-2041). The growth rates for the initial period are as follows:
* 2022: 8.05%
* 2023: 5.0%
* 2024: 3.0%
* 2025: 2.48%
* 2026: 2.4%
* 2027: 2.47%
* 2028: 2.47%
* 2029: 2.47%
* 2030: 2.47%
* 2031: 2.47%
3. Terminal Value Growth Rate: The terminal value growth rate used is 2.0%, which is based on the 5-year average of the 10-year government bond yield.

Calculating the Intrinsic Value

Now, let's calculate the intrinsic value of McDonald's Corporation (MCD) using the DCF model:

1. Growth Stage (2022-2031): We'll calculate the present value of the cash flows for each year in this period, using the respective growth rate and discounting them back to the present value using the discount rate of 7.4%.
2. Terminal Value (2032-2041): We'll calculate the present value of the terminal value using the terminal value growth rate of 2.0% and the discount rate of 7.4%.

Results and Interpretation

Based on our calculations, the intrinsic value of McDonald's Corporation (MCD) is approximately $173 billion. With the current market capitalization of $202 billion, the company appears to be slightly overvalued at the time of writing.

However, it's essential to remember that this is just an approximate valuation, and like any complex formula, garbage in, garbage out. The intrinsic value is sensitive to changes in the key assumptions, such as the discount rate, growth rates, and terminal value growth rate. Therefore, it's crucial to consider these factors when making investment decisions.

SWOT Analysis for McDonald's Corporation

To gain a better understanding of McDonald's Corporation's potential risks and opportunities, let's examine a SWOT analysis:



Strengths:
1. Debt is well covered by earnings and cash flows.
2. Dividends are covered by earnings and cash flows.

Weaknesses:
1. Earnings declined over the past year.
2. Dividend is low compared to the top 25% of dividend payers in the Hospitality market.

Opportunities:
1. Annual earnings are forecast to grow for the next 4 years.
2. Good value based on P/E ratio and estimated fair value.

Threats:
1. Total liabilities exceed total assets, which raises the risk of financial distress.
2. Annual earnings are forecast to grow slower than the American market.

By considering these strengths, weaknesses, opportunities, and threats, you can make a more informed decision about investing in McDonald's Corporation (MCD).

Conclusion

In this article, we've calculated the intrinsic value of McDonald's Corporation (MCD) using the DCF model and found that the company appears to be slightly overvalued at the time of writing. However, it's crucial to remember that this is just an approximate valuation, and the intrinsic value is sensitive to changes in key assumptions. By conducting a thorough SWOT analysis, you can gain a better understanding of the company's potential risks and opportunities. Ultimately, the decision to invest in McDonald's Corporation (MCD) depends on your individual investment goals, risk tolerance, and time horizon.