Required knowledge for McDonald's (MCD) Investors

Today we're going to take a closer look at large-cap Consumer Discretionary company McDonald's, whose shares are currently trading at $273.04. We've been asking ourselves whether the company is under or over valued at today's prices... let's perform a brief value analysis to find out!

McDonald's's Valuation Is in Line With Its Sector Averages:

McDonald's Corporation operates and franchises McDonald's restaurants in the United States and internationally. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33. In contrast, McDonald's has a trailing 12 month P/E ratio of 25.2 based on its earnings per share of $10.84.

There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.

One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.

McDonald's's PEG ratio is 2.55, which shows that the stock is overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.

Wider Gross Margins Than the Industry Average of 30.07%:

2018-02-23 2019-02-22 2020-02-26 2021-02-23 2022-02-24 2023-02-24
Revenue (MM) $22,820 $21,258 $21,364 $19,208 $23,223 $23,183
Gross Margins 47.0% 62.0% 63.0% 63.0% 65.0% 67.0%
Operating Margins 42% 42% 42% 38% 45% 40%
Net Margins 23.0% 28.0% 28.0% 25.0% 32.0% 27.0%
Net Income (MM) $5,192 $5,924 $6,025 $4,730 $7,545 $6,177
Net Interest Expense (MM) -$921 -$981 -$1,122 -$1,218 -$1,186 -$1,207
Depreciation & Amort. (MM) -$1,363 -$1,482 -$1,618 -$1,751 -$1,868 -$1,871
Earnings Per Share $6.37 $7.54 $7.88 $6.31 $10.04 $8.33
EPS Growth n/a 18.37% 4.51% -19.92% 59.11% -17.03%
Diluted Shares (MM) 816 786 765 750 752 741
Free Cash Flow (MM) $6,340 $9,017 $10,365 $7,879 $11,075 $9,247
Capital Expenditures (MM) -$789 -$2,051 -$2,242 -$1,613 -$1,934 -$1,860
Net Current Assets (MM) -$31,744 -$35,016 -$52,163 -$54,208 -$51,307 -$51,015
Long Term Debt (MM) $29,536 $31,075 $34,118 $35,197 $35,623 $35,904

McDonald's has strong margins with a stable trend, wider gross margins than its peer group, and positive EPS growth. Furthermore, McDonald's has weak revenue growth and a flat capital expenditure trend, irregular cash flows, and just enough current assets to cover current liabilities.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.