Financial Analysis of McDonald's

McDonald's Corporation is in the fast food industry and operates more than 24,000 restaurants in 111 countries worldwide. In the United States, it has 12,450 US outlets, most of them in stand-alone locations that generate a 42% share of the nation's fast-food hamburger business. Corporate communications states that a new McDonald's restaurant opens every 8 hours.

Eighty-five percent of the restaurants are independently owned and operated, with company-run stores making up the other 15%. Stock increased by 16% in 1994, and 25% of all McDonald's stock is owned by employees, licensees, and suppliers (Hoover's Online, 1999).

McDonald's is a large owner of real estate, since its policy as established by founder Ray Kroc, was that if the company owned the land, it became the landlord, and could evict the tenant at any time, a situation that helped establish a good guarantee of quality control.

The franchise owner only "owns" a 20-year agreement, renewable at the company's option. Under that agreement, the franchisee agrees to equip and run a restaurant and pay McDonald's 12.5% of gross sales in royalty and rent. Other restrictions apply. McDonald's storeowners can not operate any other business, they are not given an exclusive territory, and they take most operating instructions from the Corporate headquarters in Oak Brook, Ill. Franchisees spend a minimum of 4% of sales for marketing (Catain, 1999).

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96 54.25 41 45.38 1995 48 28.63 45.13 1994 31.38 25.56 29.25 1993 29.56 22.75 28.50 1992 25.19 19.13 24.38 Observations The rise in revenues from 1994 to 1995,1224 to 1427 without a significant change in the margins does not justify the leap in the company's stock price from $29.25 to $45.13 (closing). Therefore, we must look to other situations. One possible assumption is that the continued worldwide expansion brought more investor confidence. Another possibility, according to the franchisee quoted before, is that the company changed advertising agencies and went back to aggressive price advertising instead of institutional (Catain, 1999). Stock P/E History Year High P/E Low P/E 1997 24 18 1996 25 19 1995 25 15 1994 19 16 1993 21 16 1992 20 15 Observations The spread between the P/E ratios suggest that the stock was undergoing normal market fluctuations. When an investor buys a stock or a bond he is buying it based on a number of expectations. The most important is that he will get money (dividends) in addition to the money he invested. The percentage of money earned above the money invested is known as rate of retu

Category: Economics - F