Essay about Tales: Pizza Hut and Mcdonald

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Iryna Putilina putiryna@gmail.com CSUB Accounting and Finance Major Economic Research Center www.csub.edu/kej December 13, 2010

A Financial Analysis of McDonald ‘s Corporation
The McDonald’s Corporation is a well-developed multinational company that conducts business in 117 countries. The company and its franchisees have operated in the highly demanding and competitive fast food industry since May 15, 1940. As stated in the company’s mission statement, “McDonald’s competes on the basis of price, convenience, service, menu variety and product quality in a highly fragmented global restaurant industry.” 1 The company faces many risks, such as foreign exchange rates, interest rates, inflation, and industry regulations. In addition, current economic conditions described as “slowing economies, rising unemployment, declining wages, constrained credit, and volatile financial markets” make it even harder to compete in the marketplace. 2 Based on the company’s strategy, “comparable sales and comparable guest-counts are key performance indicators used throughout the retail industry and are indicative of acceptance of the company’s initiatives as well as local economic and consumer trends.” 3 The McDonald’s Corporation has gained competitive advantage in both national and international fast food industry. McDonald’s net income climbed from $2.4 billion in 2007 to $4.3 billion in 2008, and $4.5 billion in 2009; it is projected to reach $4.6 billion in 2010 and $5.0 billion in 2011. 4 However, McDonald’s stocks are traded less than its mean and median target value. The following target summary shows predictions for McDonald’s stock prices. The low target for stock of McDonald’s is $73.00, while the mean target is $85.56. The “close” price at which McDonald’s stock was traded on December 10, 2010 was $77.56 with a decrease of 0.5 percent.

Price Target Summary
Mean Target Median Target High Target Low Target Mean Target Median Target $85.56 $86.00 $92.00 $73.00 $85.56 $86.00

1

McDonald’s, Corporation, 10-K Annual Report 2009; retrieved October 11, 2010 from Bloomberg Business Week database, 2010 2 Ibid. 3 Ibid. 4 www.msn.com, Money, Investing

1

My examination of McDonald’s financial statements and calculation of its basic ratios are useful tools in determining current conditions of the company. As a benchmark for this analysis, five top competitors and five bottom competitors based on their collected revenues are selected. McDonald’s top five top competitors are Yum Brands Inc., Wendy’s/Arby’s Group Inc., Jack in the Box Inc., Cracker Barrel Old Country Store Inc., and Dominos Pizza Inc. Its bottom five competitors in the industry are Brazil Fast Food Corporation, Morgan’s Foods Inc., Rick’s Cabaret International Inc., Nathan’s Famous Inc., and Good Times Restaurants Inc. The following chart depicts the trend in McDonald’s stock prices relative to its main rival, Yum Brands Inc. from November 1, 2009 to November 1, 2010. Yum Brands operates five worldwide franchises: Kentucky Fried Chicken (KFC), Pizza Hut, Taco Bell, Long John Silver’s, and All American Food Restaurants (A&W). Over this period, McDonald’s price climbed 22.3 percent or $14.01 per share from $62.72 to $76.73. Likewise, Yum Brand’s price soared 36.9 percent or $13.11 per share from $35.49 to $48.60. Although McDonald’s had a greater dollar gain, Yum Brand outperformed McDonald’s with a faster growth rate.5

Exhibit 1 shows McDonald’s standing compared to the other companies in the fast food industry with respect to the profitability ratios. These ratios are important for investors to evaluate and decide if the company is healthy for investment and what returns to expect on their investment. Accordingly, McDonald’s holds a strong position among its competitors. McDonald’s return on investment (ROI) of 20.6 percent is less than the industry average of 29.9 percent and that of its top five competitors of 30.2…