A look back at McDonalds
This fast food giant has had an interesting year
It’s almost been a year since I wrote my first in depth dive on McDonalds MCD 0.00%↑, and it’s now time for me to review the company to see if my thesis has played out, or if anything major has happened to the company that might have impacted its long term prospects.
If you’ll recall, at the time of my review MCD 0.00%↑ was trading at $250, well above my valuation, and therefore I gave it a “Sell” rating, and almost immediately after posting my review I ended up selling my shares in the company for a slight profit.
You can find my initial review of the company here (Part 2 and Part 3).
The Thesis
Let’s take a look back at what I wrote a year ago to see what I thought about the company, and what the thesis for it would be:
The company has a growth path ahead of it
The company is highly leveraged, with huge amounts of debt
The business holds hidden assets on their balance sheet
The companies brand is strong, and drives their strong margins
The company is highly overvalued
How has this held up?
Let’s take it point by point:
The company has a growth path ahead of it
Well, the company has grown quite a lot in terms of revenues in 2021, though the 9 month 2022 numbers aren’t looking as steady.
Overall I still think that the underlying business is solid and has a clear growth path ahead of it.
The company is highly leveraged, with huge amounts of debt
This… Hasn’t really changed.
Indeed looking at their latest balance sheet it’s clear that while there has been a very slight decrease in long-term debt and lease liabilities, the company still has negative shareholders equity.
Honestly the high debt load is the biggest problem i have with the quality of the business…
The business holds hidden assets on their balance sheet
This hasn’t changed either, with the company remaining a significant real estate owner, which has provided a difficult to analyze and value portion of their balance sheet.
The companies brand is strong, and drives their strong margins
This too hasn’t changed, the companies brand remains as strong as ever, and their earnings and profit margins leave very little to be desired.
Ultimately its clear that the financial and cultural strengths of the company haven’t changed over the past year.
The company is highly overvalued
And here lies the rub.
MCD 0.00%↑ is trading at $274 per share, well above the price at which i sold it, and far beyond what I would consider reasonable for a business of this quality.
This is a 35 price to earnings ratio, on growth that quite simply doesn’t catch up to the high expectations of investors.
The future
Overall my thesis hasn’t changed at all, nor has my valuation.
McDonalds is undoubtedly a high quality company with a bright future ahead of it, and while I don’t particularly like the high amounts of leverage in the business, I think they will likely be able to make good on their ongoing commitments, and refinance what they can’t pay off.
The core problem with this business a year ago was the valuation, and that has only gotten worse (or better if you own it!).
I cannot justify paying these prices for a company such as this.
My current Stance: Sell
What about you? Do you still own MCD 0.00%↑ ?