In this week’s content analysis we’ll be looking at a recent Globe and Mail article (Click here to open link) on McDonald’s (MCD) by Ian McGugan (“McDonald’s stock slide should be food for thought for all investors”, May 4th, 2015), to compare Mr. McGugan’s commentary to our own StockPointer analysis. 
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The article uncovers the challenge facing Steve Easterbrook, CEO since March, in revitalizing MCD’s growth—discussing stagnant top-line growth and the limitations of any prolonged share buyback initiatives. As Mr. McGugan puts it, “The burger chain is still solidly profitable and still packs the biggest cleaver in the fast-food business, but it’s looking more and more like a company that is out of growth opportunities and out of ideas.”
Diving into StockPointer, we’ll first highlight EVA as aligning with Mr. McGugan’s view of the company’s path; the trend in EVA stopped rising at the end of 2011, remained stable through June 2014, and has since seen three quarters of decline. This decline in the EVA trend can be attributed to a recent fall in NOPAT (net operating profit after tax). In fact, NOPAT, and consequently return on capital, has been slowly decreasing since March 2012, before dropping at a faster rate over the past few quarters.
From a value perspective, now is the first time since June 2012 that MCD’s intrinsic value lies below current market price. Intrinsic value dipped from $108.70 to $84.13 (-22.6%) following Q1 2015 earnings. The current P/IV ratio of 1.16 (May 12th, 2015) is fairly high given a company that has struggled to maintain positive growth for the past several years. Future growth value (FGV) also displays a premium on the stock which would be difficult to justify paying—at 28%, FGV is the highest it’s been in five years, while current operating value is in decline.
Looking at the accounting performance, we’ll note that McDonald’s compensates for earnings growth with both share buybacks and recurring dividend increases, at least partially funded by debt. This comes back to the issues facing Mr. Easterbrook, as with a cost of capital which is likely to eventually increase, McDonald’s management will need to find different ways to generate positive organic growth. To Mr. McGugan’s point: “However, the deluge of buybacks and dividends – much of it financed with borrowed cash – raises questions about how long investors will be content with artificial earnings growth generated by financial engineering rather than by new customers coming through the door.”
