Valuation analysis for McDonald's Corporation (NYSE:MCD)

If you follow the stock market, and pay attention to the Dow Jones industrial average, you know that Wall Street is concerned about McDonald's Corporation (NYSE:MCD).  Something just doesn't seem right, analysts are concerned about it, and so are investors, so it's time to get down to the nitty gritty.  With everything considered, it's time to take a close look at fair valuation for McDonald's.

Arguably, my approach at identifying fair value is slightly different than others, so I will explain it, but keep in mind that I have found this method of identifying fair value to be extremely effective.  To identify fair value I begin by evaluating earnings excluding onetime events so that I can focus on earnings from operations.  Second, I use trailing 12 month observations to purposely exclude seasonality from my observation, and then I compare my findings either year over year or quarter over quarter to determine accurate past, current, and future earnings growth.

When I conduct this analysis for McDonald's I can see that the growth rate has been steadily declining since 2010 and turned negative for the first time last year.  As of the most recent earnings release McDonalds experienced a -3% earnings contraction.

As a result, we can see that both earnings trends are negative and that recent earnings growth was negative, but what do analysts expect going forward?  As it turns out, analysts are expecting McDonalds to turn the corner and produce positive earnings growth again.  Although, if analysts are correct about this year, the earnings growth will still be slightly negative when compared to last year, but analysts are expecting McDonalds to grow by 3.18% in 2016.

This is excellent data, and it helps us identify fair value.

McDonalds currently has a PE multiple of 17 times earnings, but the company has experienced negative earnings growth, it is expected to continue to have negative earnings growth throughout 2015, and in 2016, if analysts are correct, earnings are only expected to grow by 3.18%. 

Given the PE multiple comparisons the current price of McDonalds is five times its earnings growth estimate for 2016.  Given what analysts expect McDonalds to do in 2016, McDonalds would even look expensive at the end of 2016, after that growth was achieved, if they are right, so because we are at the beginning of 2015, two years away from the recovery according to analyst estimates, I would consider McDonalds to be extremely overvalued on a fundamental basis today.

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