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.
