Financial Analysis of McDonald's Corporation

The first McDonald's restaurant opened in California in 1954. When entrepreneur Ray Kroc began the task of turning the restaurant into a multi-location franchise, he had no idea how far the company would go. In 1965, McDonald's Corporation released its initial public offering and by 1985, it had been added to the Dow Jones Industrial Average ("McDonald's History"). McDonald's primary business is the franchising and operation of fast-food restaurants. McDonald's menu traditionally has centered on the staple items of hamburgers and french fries since its creation, but has been expanded in recent years to include new items like salads and fruit. Currently, the company has 31,489 restaurants in 118 countries, about 20,000 of which are operated by franchisees (Owens).

Among McDonald's competition in the field of fast food chains are Yum! Brands Inc., which owns the Pizza Hut, Taco Bell, KFC, and Long John Silver's chains, and Burger King Holdings Inc. McDonald's attempted to increase its competitive edge with these rivals by acquiring brands in addition to its McDonalds stores (including Boston Market and Chipotle Grill) but has sold off these additions in 2006 and 2007. According to the McDonald's 2007 Annual Report, the corporation's strategy to compete with its rivals involves a focus on "being better, not just bigger" ("2007 Annual Report"). In recent years, both McDonald's and its competitors have worked to associate their brands with affordability, each working to increase the number and quality of low-cost offerings.

When studying industry financial ratios, the presence and success of McDonald's within its industry can be clearly seen. The corporation's high current ratio indicates that, in relation to current liabilities, McDonald's possess more current assets, meaning it is able to more quickly pay off debt coming due. An inventory turnover that is more than double industry average also indicates that the firm is in good standing with balancing sales and inventory on hand. Additionally, McDonald's profit margin is considerably above both industry averages and its leading competitors. This shows that McDonald's is keeping costs low, resulting in nearly 20% of sales becoming net income.

One set of ratios that McDonald's falls behind its industry and competitors is Return on Equity and Debt Ratio (which for this study is derived directly from Return on Equity). This can be attributed to McDonald's large volume of stock, nearly three times greater than competitor Yum! Brands, which dilutes earnings over a greater number of shares and results in a lower ratio.

Looking at the performance of McDonald's stock over the past five years one can see significant growth, with the price per share now being more than double that of November 2003. The one-year graph of its performance also provides encouraging results, although it may not at first appear to be so. One share of McDonald's stock currently costs almost exactly what it did one year ago, an impressive feat considering the troublesome economy of 2008.

McDonald's better-than-average performance of 2008 is summed up in the beta of the company's stock, 0.77. This number means that the stock is less volatile than the market as a whole, and will usually react less to market-wide shifts, both up and down. In simpler terms for today's economy, McDonald's is essentially "recession proof," and with the global economic downturn of late 2008, the company's brand association with value has allowed them to not take the hard hit most of the market has.

According to Morningstar Investment Research Center, McDonald's forecast in the future looks strong, bolstered by strong international growth and new menu items to increase same-store sales. The main risks to the company, according to Morningstar, are rising food and energy costs, which could make it hard for the company to keep prices low and maintain the consumer perception of value they rely on. Also, Burger King Holdings Inc. is becoming more of a player in the market. With all these consideration, Morningstar values McDonald's Corporation's stock at $59 a share. As of November 7, the stock's actual trading price was $55.47. A trader, thus, can infer that the stock is undervalued and would be a good buy.

Like all large corporations, McDonald's will have to stay very aware of its customers and the market it operates within in order to stay successful in the midst of the current economic recession. If the company's financial ratios and stock performance are any indicator, though, it appears that McDonald's will be able to stay profitable and continue to be the industry leader they have been for years.

Sources:

"2007 Annual Report."McDonald's Corporation. 2008. 14 Nov. 2008.

"McDonald's History."McDonald's Corporation. 2008. 14 Nov. 2008.

Owens, John. "Analyst Report: McDonald's Report." MorningStar Investment Research Center. 10 Nov. 2008. 14 Nov. 2008.