麦当劳被高估了

While McDonald\'s Corporation is a great company, we see shares of MCD as meaningfully overvalued as of this writing.

The flight to safety has seen shares of quality companies like McDonald\'s shoot upwards since the start of 2019; however, its technical performance of late is worrisome.

We are staying firmly away from McDonald\'s, and caution the firm carries a significant net debt burden.

Even after their recent dip, we still think shares of McDonald's Corporation (MCD) are still overvalued here as the flight to safety has seen companies with quality business models get overbought, in our view. At the top end of our fair value range, derived through our discounted free cash flow analysis, we value MCD at $187 per share, well below where McDonald's is trading at as of this writing. Furthermore, while we respect McDonald's free cash flow profile, its large net debt load severely weakens its dividend coverage. Shares of MCD yield 2.5% as of this writing.

In the graphic below from our 16-page Stock Report, we highlight the valuation assumptions we used when building our discounted free cash flow model (defined as net operating cash flow less capital expenditures). Even under generous assumptions given the firm's impressive operational performance of late, we couldn't justify its current share price.

Please note that we modeled in material free cash flow growth as you can see in the graphic below from the same report.

From 2016 to 2018, McDonald's annual free cash flows have averaged $4.1 billion. The company's annual dividend payments averaged $3.1 billion during this period and please note the firm engaged in material share buybacks as well. McDonald's diluted share count fell by ~9% from 2016 to 2018, bolstering its diluted GAAP EPS which rose from $5.44 to $7.54 during this period.

However, we caution that McDonald's net debt load stood at $30.2 billion at the end of 2018. As of this writing, McDonald's has yet to publish its 10-Q filing with the SEC (which is normal, it can take a few days), so we don't know yet what its balance sheet looked like at the end of the third quarter (the balance sheet wasn't included in McDonald's earnings press release either).

With all of this in mind, here are some of our thoughts on the key strengths and potential weaknesses of McDonald's dividend coverage, from our two-page Dividend Report:

From 2016 to 2018, the number of company-operated McDonald's stores fell from ~5,700 to ~2,800, while the number of franchised stores rose from ~31,200 to ~35,100. We strongly support McDonald's shift towards being largely a franchise-oriented business as that removes a substantial amount of store-operatorship risk from its business model. Here's why we see the fast food industry as being a decent but not exceptional space to operate in from a shareholder value generation standpoint, from our 16-page Stock Report:

That being said, we want to stress that the company's return on invested capital ex-goodwill has consistently exceeded its estimated weighted-average cost of capital over the past three full fiscal years. Going forward, we expect that should continue being the case, highlighting McDonald's ability to generate meaningful shareholder value in a so-so industry.

McDonald's has benefited from reduced advertising expenses over the past few years, which fell from $646 million in 2016 to $389 million in 2018. These expenses are largely related to the contribution company-owned stores make to advertising cooperatives. Product costs related to television and advertising campaigns, along with other marketing-related expenses (such as those included in SG&A), fell by $1 million during this period to $88 million in 2018. Cost reduction initiatives and the pivot towards a franchise-heavy business model played a key role in bolstering McDonald's GAAP operating margin by over 1,050 basis points from 2016 to 2018, a truly remarkable feat.

We'll give credit where credit is due, McDonald's is performing very well when it comes to growing comparable store sales. All-day breakfast was a big winner once McDonald's got the formula down right. Here's a key excerpt from the firm's third quarter 2019 earnings call with analysts:

McDonald's is a great company, and we recognize that the firm is performing very well operationally, however, we can't get behind its current valuation. Shares of MCD are overvalued in our view, and we are staying away from the name.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:

This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice.