Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management Zach Geerdes [zachary-geerdes@uiowa.edu] McDonalds (MCD) October 13th, 2019

Consumer Discretionary – Quick Service Restaurants Stock Rating Buy

Investment Thesis Target Price $250 - 260 The Henry Fund is optimistic towards McDonalds for three main reasons. First, McDonalds’ continued push towards becoming a technology leader in the quick service restaurant industry. Second, their industry leading same store sales growth. Finally, their ability to diversify their revenue streams leads us to issue. For these reasons we issue a BUY rating and forecast a 25% upside for MCD. Drivers of Thesis • Three technology acquisitions in 2019 shows McDonalds commitment to

becoming a technology leader. Over the long term this will help improve operating margin from 42% in 2018 to 48% in 2023.

• Shifting towards 95% franchised stores will allow McDonalds to become

more profitable and more diversified from strictly retail business. • Industry leading same store sales growth over the past 3 years between 3-

5% makes us bullish towards management’s ability to drive sales while lowering store count. We forecast a 2.0% forward five-year CAGR of revenue.

Risks to Thesis • If McDonalds cannot continue to generate above industry average same-

store sales growth we believe this would be a sell signal, as McDonalds does not have much room for store growth.

• McDonalds’ inability to make significant use of their technology

acquisitions would lead us to question the competency of management. This could be as simple as letting another quick service restaurant take over as the head of technology innovation.

Henry Fund DCF $378 Henry Fund DDM $313 Relative Multiple $253 Price Data Current Price $208.90 52wk Range $165.77 – 221.93 Consensus 1yr Target $233.85 Key Statistics Market Cap (B) $158.30 Shares Outstanding (M) 767.10 Institutional Ownership 70.50% Store Count 37,855 Dividend Yield 2.36% Price/Earnings (TTM) 27.40x Price/Earnings (FY1) 26.02x Price/Sales (TTM) 6.65x Price/Sales (FY1) 6.18x Profitability Operating Margin 41.90% Profit Margin 28.30% Return on Assets (TTM) 18.90%

Source: Factset

Earnings Estimates Year 2016 2017 2018 2019E 2020E 2021E

HF EPS $5.44 $6.37 $7.54 $8.01 $8.85 $9.51 Growth % 17.4% 18.3% 6.2% 10.4% 7.4% Consensus $5.44 $6.37 $7.54 $7.98 $8.74 $9.35

12 Month Performance Company Description

Source: Yahoo Finance

McDonald’s is an American fast food restaurant franchise, famous for serving burgers like the BigMac. McDonald’s was founded in 1940 and is considered an early pioneer of the fast food industry. Currently McDonald’s is the second largest fast food restaurant in the world and the fourth largest employer (by employee count) in the United States with over 2.0 million employees.

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EXECUTIVE SUMMARY

We believe that MCD is currently being undervalued by the market. Due to superb marketing and management, MCD has an adept ability to generate same-store sales growth that is above the industry average. In addition, we are very bullish on the technology investments that MCD is making, and we believe these investments will lead to margin improvements moving forward. Finally, we believe that MCD has made the correct move in shifting towards a store ownership structure that is more franchised. This structure will allow them to become more profitable and diversify away from direct consumer revenue. For these reasons, we believe that MCD is currently a BUY, with an upside of 25%.

COMPANY DESCRIPTION

MCD is second largest fast food restaurant chain in the world by store count, with over 37,000 stores worldwide. Below is a list of the largest restaurants by store count as of 2018:

Quick Service Restaurant Store Count Subway 42,998 McDonald’s 37,855 Starbucks 30,000 KFC 20,404 Burger King 16,859

Source: Company 10-K’s

Aside from simply selling burgers MCD is also one of the largest corporate land owners in the United States, some consider them a real-estate company as it is estimated they own over 50,000 acres of land. MCD’s revenue can be broken down in many ways, the following graph will show the revenue break down by ownership type over time:

Source: MCD 10-K, Henry Fund Estimates

As one can see, MCD has been lowering company operated revenue. This is due to MCD transitioning company operated stores into franchised stores. Fiscal Year 2018 was the first year that MCD received more revenue from franchised stores than company operated stores, and we expect that trend to continue. We forecast that in 2023, 65% of MCDs revenue will come from franchised stores and 35% will come from company operated. This is very intriguing because it will mean that in nearly 7 years, MCD managed to flip their entire store ownership structure. This important because of the margin improvement that comes with having more franchised stores. In 2018, MCD had operating margins of 17.45% on company operated stores compared to 82.02% on franchised stores. These margins do not include SG&A, because MCD does not provide guidance on how SG&A is allocated by store type. However, if we assume a 50/50 split of SG&A the operating margin for company operated stores would be 6.42% and franchised would be 72.09%.

Company Operated Stores

MCD has been selling its company operated stores to franchisees in order to achieve their goal of a 95% franchised store model. The below graph shows the transition of MCD store types:

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Source: MCD 10-K , Henry Fund Estimates

The red line is indicating when we forecast that MCD will hit their goal of reaching 95% franchised. As one can see we believe it will occur around 2022. Aside from 2016, MCD has been rather slow in transitioning stores over to franchisees. We believe that as they have less and less stores to choose from it will become increasingly hard to decide which stores, they no longer want to hold. For this reason, we expect the transition rate to slow down moving forward.

The company operated stores offer higher sales because MCD keeps all the income that flows through those stores. However, that also means that MCD is responsible for all of the expenses, thus resulting in lower margins. To increase operating margins, MCD has been switching to a franchised model.

MCD is keeping 5% as company operated and we expect that MCD’s will keep their most profitable stores, we expect these company operated stores will not be limited to the United States. For this reason, we forecast an increase in overall company operated revenue per store from $3.55 million per store in 2018 up to $3.96 million per store by 2023. Franchised stores generate significantly less revenue per store for MCD. In 2018 franchised stores generated $0.31 million per store and we expect this number could climb to $0.39 as MCD focuses more on their franchised model. The large revenue per store difference is because MCD does not keep every dollar that flows through their franchised stores, they only keep royalties and rent.

Franchised Stores

Franchised revenue can be broken down into three categories: Rent, Royalties, and Initial Fees. The following graph is the most recent breakdown of franchised revenue:

Source: MCD 10-k

In 2018 MCD received roughly 64% of its franchised revenue from rent and 35% of its revenue from royalties. Below is what we are forecasting for 2023:

Source: MCD 10-k

As one can see we believe that royalties will take over a bigger cut of the franchised revenue. We forecast that around 58% of MCD franchised revenue will come from rent while 42% will come from royalties. This change will take place due to gradual raising of royalty fees outpacing the increase in rent raises.

Rent

One major stream of revenue for MCD is the rent they charge to franchisees. This rent makes up 1/3 of their

2018 Franchised Revenue

Rent Royalty Initial Fee

2023 Franchised Revenue

Rent Royalty Initial Fee

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revenue. We calculated that MCD charges around $200,000 per store per year. We expect this rate will rise gradually over time and will most likely depend on local commercial real estate prices. It is reported that 85% of MCD’s franchisees pay rent to MCD[10].

An interesting note is that MCD makes enough money on rent to more than cover the operating expenses related to the franchised stores they own and the interest expense on the debt that they took out to acquire the properties. This is the reason that some investors treat MCD as a REIT rather than a consumer discretionary company.

Royalties

Royalties account for around 15% of MCD’s total revenue. It is estimated that royalty rates for a MCD franchise are between 3-5% of franchised sales, with no base minimum. The royalty rate is a range because not all franchisees are going to pay the same royalty rate. We expect that high demand locations, and loyal franchisees will get lower royalty rates.

We believe that as MCD continues to be more tech enabled, they will be able to pass along valuable information and even help improve operations for franchisees thus allowing them to increase royalties and increase franchised revenue.

Initial Fees

Initial fees are the fees that a franchisee pays MCD to enter into a franchise contract with MCD. These fees are paid every time a new franchise contract is signed, MCD tries to sign 30-year franchise contracts.

Initial fees are a relatively small part of MCD revenue, and we do not expect that to change. It is estimated that MCD charges $45,000 in initial fees[3]. We believe that MCD will raise royalty rates rather than make any significant changes to initial fees because raising initial fees may deter new franchisees from opening stores and increasing royalty rates gives MCD more money over the long term.

Due to revenue recognition changes, Initial Fees are going to be recognized on a straight-line depreciating basis. Each year will account for 1/x of the total fee amount, where x equals the total amount paid for the licenses to operate a MCD franchise.

Geographic Breakdown

MCD operates worldwide. They break down revenue into four main categories: U.S., International Lead Markets, High Growth Markets, and Foundational & Corporate Markets. The 2018 store count’s have also been attached to each segment for more detail.

U.S.:

13,218 Franchised / 696 Company Operated

The U.S. segment is the largest segment of MCD’s revenue, however as noted below we expect MCD to continue to sell off stores in the U.S. and look for growth over-seas.

International Lead Markets:

6,149 Franchised / 838 Company Operated

This segment consists of countries such as: Australia, Canada, France, Germany, United Kingdom, and others. This segment is for developed countries like the United States.

High Growth Markets:

5,233 Franchised / 1,072 Company Operated

High growth markets consist of countries such as: China, Korea, Italy, Netherlands, Poland, Russia, Spain, and Switzerland. These markets are prominent countries that MCD believes they have significant opportunity for expansion in. We believe that most of the United States stores that are sold off will be made up by store openings in the high growth market.

Foundational & Corporate:

10,436 Franchised / 213 Company Operated

This market is basically defined as “everything else.” Majority of these stores are franchised and we don’t for see any major changes in stores in this segment.

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Below is a breakdown of stores by region of operation:

Source: MCD 10-K, Henry Fund Estimates

As one can see, the growth will be in the High Growth segment. As we stated, these are the markets that MCD is underrepresented in and believes they have significant opportunity to expand in these countries.

Consensus vs. Henry Fund

We believe we differ from analysts on margin and revenue growth for two reasons:

Technology Acquisitions

As one will see in our next section, MCD has made significant technology investments.

We are very optimistic on MCD’s ability to use their technology investments to expand sales and increase margins. We believe that becoming more data-savvy, through investments and hiring of data scientists, will enable MCD to improve efficiency in almost all aspects of the business. The technology that MCD is trying to implement will not only allow them to eventually automate the drive thru’s but they will also know more about their customers tendency than any other fast food competitor. Because of this belief, we have forecasted margins and revenue growth that outpace analysts.

Management

Our second point of differentiation is MCD management. Despite the recent outing of former CEO Steve Easterbrook, we believe that management is still strong. Easterbrook was vital in getting the technology transition started, but we do not expect the transition to halt simply

because he is gone. We believe that MCD’s comparable sales growth, as well as technology investments can be attributed to management. We feel that good management can take a company to new heights and we are very confident in MCD’s ability to operate effectively and efficiently moving forward.

Margin and Revenue Differences

We expect MCD management and MCD’s technology acquisitions and improvements to drive both margins and revenue growth. Here is how the Henry Fund compares to consensus:

• 2023CV Year Operating Margin

HF: 48.47% vs. Consensus: 47.51%

• 4 Yr. Forward Revenue CAGR

HF: 2.30% vs. Consensus 2.10%

RECENT DEVELOPMENTS

Management Changes

In November, Steve Easterbrook was ousted from his position as CEO of MCD. This change came after a violation of company policy. Easterbrook was engaged in a consensual relationship with a sub-ordinate. The new CEO will be Chris Kempczinski who was previously a Senior Vice President of MCD. Kempczinski has served his entire career in consumer food companies, starting at Kraft Heinz and working at Pepsi before joining MCD[15].

This change is significant because Easterbrook was vital in starting the transition in making MCD more tech enabled. While this situation is not ideal, we do not believe Kempczinski will stray off of Easterbrook’s paved path. We believe MCD will continue to push forward and lead the QSR industry in technology innovations.

Technology Investments

Self-Service Kiosks

MCD started rolling out self-service kiosks in the summer of 2018. These kiosks were implemented to take some of the wait time away from the counter. MCD has stated they plan to roll out these kiosks into 1,000 stores per quarter[4].

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In franchised stores, MCD has stated that they plan to pay for 55% of remodeling costs up front if the remodel is completed before FY end 2020. If the remodel is completed after, MCD will only pay 40% [11].

Younger generations are increasingly tech enabled and we believe these kiosks will be used more frequently in the future. As with many other investments MCD is making, it seems like yet another way to automate the store operations and cut out workers.

McD Tech Labs

With all the recent technology investments, MCD has opened an office in Silicon Valley to stay on the cutting edge of technology. This office will be called McD Tech Labs and will employ technology experts like data scientists and engineers[5].

We believe this is a very big development for MCD and will allow them to continue their dominance in technology as well as in the industry in general.

Dynamic Yield

MCD acquired Dynamic Yield in Mar. 25, 2019 for $300 million cash. Dynamic Yield will bring machine learning technology to MCD’s drive through menu boards. This technology can make suggestions for drive thru customers based factors such as: weather, traffic flow, current items, and more[6].

Plexure

On Apr. 1st, 2019 MCD made a minority investment of 9.9% of Plexure. In exchange, Plexure agreed not to work with any of MCD’s competitors. It is believed that MCD provided a specific list of those they could not work with. Plexure is a New Zealand based technology company that helps MCD with their mobile application[7].

This move seems to be a clear signal that MCD plans on continuous improvements to their Mobile-App.

Apprente

On Sept. 10, 2019 MCD acquired Apprente, it is estimated that the purchase price was between $10 million - $50 million in cash[12]. Apprente a company that specializes in voice based, conversational technology. This technology will be used in MCD’s drive thru’s[8].

This is the first significant step in MCD being able to automate their drive thru line. We believe MCD will eventually have the first automated drive thru, which will allow them to increase operating margins.

95% Franchised

MCD has stated they believe that a company mix that is 5% company owned and 95% franchised is the optimal mix for their growth. Franchised stores have higher margins, as we stated earlier a franchised store has an operating margin between 72% - 82% while company operated stores are 6-17%. The benefit of a company operated store is that they offer higher sales. In 2018 the average franchised store generated $0.31 million per store, while the average company operated generated $3.55 million per store. We expect MCD to move less profitable stores to a franchisor while holding on to high profit, high sales locations.

As we showed above, we believe that MCD will achieve a 95% franchised ownership structure by 2022. Once MCD reaches this structure we would expect them to focus on increasing operational efficiency, and figuring out way to increase profits from franchised locations.

Earnings

Unfortunately MCD missed consensus earnings in 2018 and we attribute this to the expectations treadmill. For example, despite missing earnings by nearly 10% in 2017, consensus 2018 earnings numbers expected MCD to increase EPS by nearly 20%. After the full year results in 2018, 76% of analysts had buy ratings while 24% had holds.

The most recent quarter was MCD 2019 Q3, in this quarter MCD missed on revenue but & earnings. Consensus revenue was $5.48 billion, while actual revenue was $5.43 billion. Consensus earnings were $2.21/share while actual earnings were $2.11 per share. One bright spot in of the Q3 earnings was that MCD managed to produce 5.9% same store sales growth, which exceeded the 5.4% growth that Consensus forecasted. MCD also posted operating margin growth, coming in at 45.6% compared to 2018 Q3 of 45.1%. Despite margin improvement and global same store sales growth, the overall sentiment was negative. The average target price among analysts fell 1.3% following the announcement.

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INDUSTRY TRENDS

Technology Focus

The entire industry is becoming more tech enabled. Today most fast food restaurants not only have an app, they also have the ability to order online or through delivery apps. Technology has made it easier for quick service restaurants to meet consumers where and when they want food.

As upward minimum wage pressure continues to grow, we believe that quick service restaurants will increasingly acquire or partner with machine learning and artificial intelligence companies in order to automate processes such as the drive thru. We have already seen MCD take the first steps in this process.

New Products

The industry is mature and most competitors are selling similar products, we believe that the industry will focus on creating new products and taking advantage of current trends. MCD has rolled out plenty of new items, in 2019 they have come up with six new menu items and continue to add more every year. MCD was once known for their notorious dollar menu, however with rising costs we simply do not believe it is feasible. We believe that MCD will rather opt to continue with current promotions such as the “3-2-1” options where things on this section of the menu cost $1-$3. Another current promotion campaign “Buy 1 get one for $1” on select menu items. This gives MCD more power over their COGS. For example, if MCD has excess chicken or chicken prices are low they could run chicken sandwiches through one of these promotions.

All Day Breakfast

One example of offering new products is MCD offering all-day breakfast. MCD started offering all-day breakfast in 2015 as an attempt to increase their U.S. same store sales growth and because of customer demand. While offering all-day breakfast does allow MCD to expand their menu and potentially increase sales, it also comes with additional costs. For this reason, in MCD decided to trim breakfast offering in 2019[16]. The breakfast menu’s will be decided by the local store owners, this gives franchisee’s slightly more power over their operations.

We see MCD’s breakfast offering as a competitive advantage in the industry as many peers are very underrepresented or non-existent in the breakfast market. For example, Burger King still cuts off breakfast at 10:30am.

Plant-Based Meat

With Beyond Meat’s 2019 IPO many people are becoming interested in plant-based meats. Numerous restaurants in the industry are adding plant-based meats to their menus, for example Burger King, Hardees, McDonalds, White Castle and Qdoba. This is a huge current trend and many analysts believe this could be a huge market as it appeals to vegetarians and vegans. We would expect that this would harm operating margins of restaurants because the preparation will have to be done completely separate from the preparation of meat options.

Plant-based meats can certainly help companies like MCD increase sales by expanding their target market to vegans and vegetarians, however these products are not going to increase MCD margins. Plant-based patties cost around $2.85, while regular patties cost around $0.80. The gross margin on beef patties are around 80% while the current gross margins on plant-based meats are around 75%[8]. Currently, fast food restaurants are in a conundrum with plant-based meats because they do not want to have exorbitant prices, however they also do not want to diminish margins.

Demand for Healthy Options

Consumers have become more health conscious in recent years and fast food restaurants are attempting to adapt by offering some healthier options on their menus. It is important to consider that MCD and other fast food providers are not targeting extremely health conscious people. They are targeting those people who require convenience or low-cost food. MCD starts to get hurt, if consumers switch from grabbing MCD on a road trip to pre-cooking food and bringing it with them. We do not see any significant impact coming from health concerns. We believe this trend will force MCD to expand their menu and market items as “healthy” while taking higher margins on said products.

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MARKETS AND COMPETITION

MCD operates in the quick service restaurant industry. Some of the notable companies in the space are: Chipotle (CMG) , Wendy’s (WEN), Jack In The Box (JACK), Domino’s Pizza (DPZ), Yum Brands! (YUM), Restaurant Brands International (QSR), and Red Robin (RRGB). The next section will compare MCD to the competitors previously mentioned.

Store Ownership Breakdown

It is important to start with a store breakdown of each company. How a company structures their store ownership can have a major impact on margins and sales growth. Below is the ownership breakdown for each company:

Ticker Company Operated Franchised

# of Stores

MCD 7.0% 93.0% 37,855 YUM 1.8% 98.2% 48,124 QSR 0.0% 100.0% 25,744 DPZ 2.5% 97.5% 15,914 WEN 13.2% 86.8% 6,711 CMG 100.0% 0.0% 2,491 RRGB 84.5% 15.5% 573 JACK 6.1% 93.9% 2,237 Avg. 6.6% 93.4% 17,456

Source: Company 10-K’s

Interestingly MCD is right around the median level of store ownership. But it is very clear that majority of the industry is converting to a heavily franchised model. The exceptions are RRGB and CMG. We believe CMG is keeping control of all their stores for quality assurance purposes, however we feel they would benefit greatly from moving to a franchised model.

Margins

Profitability is very important as it shows not only how operations are going but also shows how management is doing. The following table will show gross, operating, and net margins:

Ticker Gross EBIT Net MCD 52.3% 41.9% 28.3% YUM 49.3% 33.6% 24.3% QSR 57.6% 36.6% 19.4% DPZ 38.6% 16.9% 10.8% WEN 29.8% 16.5% 28.9% CMG 15.4% 8.2% 4.8% JACK 32.1% 22.8% 9.7% RRGB 12.7% 1.5% -0.1%

Avg. 36.0% 22.3% 15.8% Source: Company 10-K’s

One can see that MCD has very good margins compared to competitors. They are the only company in the top two of each margin category. Furthermore, as we stated before we expect MCD will see bottom line margin improvement as they continue to shift towards a franchised model.

Same Store Sales Growth

Many quick service restaurants will simply continue to build stores to drive revenue growth, however this becomes a problem when you reach a point where your stores are cannibalizing each other’s sales. Same store sales growth shows how effectively each company can drive sales without opening a new store. The following table shows the industries same store sales growth:

Ticker Comparable Sales

Growth FY18 MCD 4.5% YUM

KFC 2.0% Pizza Hut 0.0% Taco Bell 4.0%

QSR Burger King 2.0% Popeyes 1.6% Tim Horton 0.6%

DPZ 6.0% WEN 1.3% CMG 4.0% JACK 0.1% RRGB -2.6%

Avg. 1.96% Source: Company 10-K’s

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As one can see MCD put up top notch comparable sales growth in 2018, crushing the industry average by 250 bps. Moving forward we are expecting MCD to see same store sales growth consistently above 3% due to technology improvements and marketing.

We believe that lately Dominoes (DPZ) has been benefitting greatly from the recent demise of Papa John’s (PZZA), we expect that DPZ will see a comparable sales growth rate closer to that of MCD moving forward.

Revenue Per Store

To take a deeper dive into revenue we look at revenue on a per store basis, the following table summarizes the industry:

Ticker Rev/ Company Store

(M) Rev/ Franchised

Store (M) MCD 3.55 0.31 YUM 2.33 0.07 QSR 0.00 0.21 DPZ 1.32 0.06 WEN 0.73 0.16 CMG 1.95 0.00 JACK 2.29 0.25 RRGB 3.20 0.20

Avg. 1.92 0.16 Source: Company 10-K’s

MCD is very good at generating sales in both companies operated and franchised stores, finishing at the top of the list in both categories. Being able to generate more revenue per store gives a company the ability to reduce fixed costs by requiring less store space.

Ratios

We also compared the industry by a few select ratios that we felt were important:

Ticker EV/EBITDA FCF

Yield Debt/EBITDA MCD 19.71 3.03% 3.18 YUM 22.16 3.11% 5.05 QSR 19.18 4.17% 6.06 DPZ 20.93 2.53% 5.21 WEN 20.50 4.03% 6.95 CMG 35.30 2.77% 0.00 JACK 12.27 2.74% 3.87 RRGB 9.86 21.93% 1.60

Avg. 19.99 5.54% 3.99 Source: Company 10-K’s

MCD is currently trading beneath the industry average on both EV/EBITDA and Debt/EBITDA. This is very important because it shows that although MCD has been taking on significant amounts of debt to acquire land, they have an EBITDA that can support the debt level.

One negative side of MCD is that they have a rather low Free cash flow yield. However, aside from RRGB, who inflated the industry average, every company has a below average FCF yield.

We also examined the industry with some relative valuation metrics:

Ticker P/E LTM P/E FY19 P/S LTM P/S FY19 MCD 27.40 26.02 7.69 7.50 YUM 26.76 28.99 6.40 6.14 QSR 34.79 25.07 5.93 5.85 DPZ 28.23 27.14 3.03 2.91 WEN 11.07 37.52 3.11 2.92 CMG 95.07 62.39 4.59 4.24 JACK 25.08 19.62 2.48 2.33 RRGB - 28.78 0.32 0.32 Avg. 35.49 32.92 4.19 3.77

Source: Company 10-K’s

Interestingly, MCD trades at the low end of price to earnings and the high end of price to sales. This suggest that MCD does not generate enough sale to justify their price, but at the same time their earnings say the opposite. We believe this is because of the recent shift MCD has made to cut costs. The market still likes MCD because they have been able to improve their earnings, despite lowering sales.

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The P/E and EV/EBTIDA ratios imply that MCD is undervalued compared to peers. We believe this is because MCD is in a mature phase and is not expecting rapid revenue growth. On the flip side Chipotle (CMG) has a very high EV/EBITDA & P/E ratio because they have significant growth opportunity. CMG only has 2,500 stores compared to MCD ~38,000. This means that CMG can expand by opening new stores, where MCD cannot.

ECONOMIC OUTLOOK

Income & Spending Growth

Consumer spending and income growth are very closely tied together. In general, strong income growth will lead to strong consumer spending. However, it should be noted that strong income growth is not the only factor in strong spending growth. For example, in December 2018 (red arrow) the markets dropped significantly which prompted a huge drop in consumer spending despite one of the strongest months of wage growth in the last three years.

Source: Factset

For a consumer company like MCD, both metrics are important. The more money a consumer has the more money they are willing to spend. In addition, if a consumer feels good about how much they are making, it is much more likely that consumer confidence will remain higher.

We also believe that when consumer spending is high and unemployment is low, consumers are more likely to eat meals away from their home because they are busy at work.

Consumer Confidence

Source: Factset

Despite a trade war and an inverted yield curve, consumer confidence has been very strong. In fact, the “Present Situation” portion of consumer confidence is at its highest point since Nov 2000, shortly before the “Dotcom Bubble” burst.

Consumer confidence is very important to monitor when dealing with consumer cyclical companies. A dip in the overall consumer confidence can be directly tied to lower consumer spending which in turn results in lower sales for consumer cyclical companies.

Today, Fed rate cuts and the trade war with China are our main concerns for the consumer confidence number. We are unsure if this so called “trade deal” that occurred in early October will hold any weight. We continue to monitor the situation.

Healthy vs. Unhealthy Economy

MCD offers some of the lowest menu prices in the industry we believe that in an economic downturn consumers will shift spending towards MCD. This means that MCD will be less harmed by an economic downturn than fellow competitors. On the flipside, we expect that in a healthy economy consumers will either purchase higher priced menu items or shift to higher perceived quality restaurants.

Unemployment

In the past decade the lowest Unemployment rate was 3.6%. This rate was achieved in second quarter of 2019.

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The current unemployment rate, as of October, is 3.6%, many consider this to be full employment. Currently we have no reason to believe that unemployment will spike.

Low unemployment is good for the economy, however low unemployment makes finding workers for quick service restaurants very challenging. This is another reason we believe that MCD will make a push towards automating jobs, and franchised locations. With franchised locations the duty of hiring workers falls to the franchisee instead of MCD.

Wage Pressure

Recent surveys have found that the average McDonalds worker (non-corporate) makes between $8 and $9 per hour. The average quick service food worker makes $20,000 - $25,000 per year before tax[13]. The average median wage in the United States is $50,000, which means the average MCD store worker is earning 50-60% less than the average[14].

After a long fight about increased wages, MCD announced in 2019 they would stop fighting against the movement for a $15 minimum wage. We believe this is writing on the wall for future employment cuts by MCD.

Interest Rate

The Fed has now cut the Fed Funds rates thrice in 2019. The current Fed Funds rate range is 1.50 – 1.75%. This is important because a lower Fed Funds rate allows for firms to borrow at lower costs. In addition, the rate cuts are designed to encourage consumer spending in the economy. We believe it is very likely that rates could see at least two more 25bps (1.25% - 1.50%) cuts by the end of 2020.

These rate cuts are good news for MCD. MCD currently has around $35 billion of debt and has been constantly putting more debt on. If MCD is able to negotiate lower debt payments, they will be able to improve earnings by lower interest expense.

CATALYSTS FOR GROWTH

Technology Investments

With the recent technology investments MCD has made, we believe that MCD has significant room for growth as the technology leader in the quick service restaurant industry.

We believe that these investments will allow MCD to have a better understanding of their data which will in-turn give them a clearer picture of their operations and what needs improving. We also believe that machine learning will allow them to automate tasks that were previously done by workers, thus lowering SG&A.

Franchised Store Shift

As MCD shifts towards a 95% franchised ownership structure we believe that they will be able to improve their margins and become more operationally sound.

Same Store Sales Growth

With consistently above average same store sales growth, we believe MCD is positioned very well in the industry. As more and more companies reach the point of cannibalizing their own sales, strong same store sales growth becomes even more important.

INVESTMENT POSITIVES

• MCD is a technology leader in the quick service restaurant industry. We believe this gives them a competitive advantage and is a good signal for management’s ability to adapt and lead growth.

• The shift towards 95% franchised model will allow MCD to become more profitable, while also limiting their exposure to consumers.

• Strong same store sales growth proves that MCD does not rely on store expansion to drive growth.

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INVESTMENT NEGATIVES

• Franchise owners rebelling against increases in royalty rates could impact MCD’s bottom line and revenue growth

• MCD must continue to generate above average same-store sales growth, if they fail to do this it may be a sell signal

VALUATION

Revenue

Our revenue estimates are right in line with consensus. We believe that revenues will grow slowly, around a 5 year forward CAGR of 2.00%. We expect a CV growth rate of around 2.00%. The 5 year CAGR is equal to the CV growth rate because MCD’s revenue will be decreasing or slowly increasing in the short-term due to the store shifts.

Franchised

Our first point of differentiation is that we believe franchised revenue will grow faster than what analysts are predicting. We believe that MCD will be able to leverage their size, technology and network to charge either higher rent or higher royalties. Which will lead us directly into the next section.

Store Count

We are forecasting that store count will grow at a 5-year forward CAGR of 1.80%. The current store count is 37,855. The current store breakdown is 93% franchised and 7% company operated. In 2023, we are forecasting that there will be 41,300, 95% of those stores will be franchised and 5% will be company operated.

Revenue Per Store

We are forecasting that total revenue per store will only improve slightly:

Company Operated

Franchised

Total

2018 $3.55 $0.31 $0.56 2023 $3.96 $0.38 $0.57

Source: Company 10-K

Since a greater number of stores will be franchised, total revenue per store will only improve slightly. We expect that franchised stores and company operated stores will increase revenue per-store as MCD utilizes their tech abilities and leverages marketing campaigns.

Margins

This is another point where we differ from analyst. We are expecting margins to improve at a higher rate than most analysts, thus resulting in higher earnings.

We believe that as MCD continues to shift ownership types towards franchised stores and as they continue to make investments in technology, they will see improvements in margins.

We are assuming that the technology investments that MCD has made will ultimately lead towards improving efficiency in the workspace and cutting costs. Those costs may be cutting workers by automating processes or cutting costs by improving logistics.

Debt

As MCD continues to switch stores and re-model stores, we believe that MCD will continue to add on debt. However, as we showed in our peer comparison section, MCD has a relatively low Debt/EBITDA ratio compared to the industry. We believe the Debt/EBITDA ratio will teeter right around 3.20x moving forward. Thus, debt should not be a cause for concern for any investors.

EBITDA Debt Payment

Interest EBITDA/Debt Obligation

FY20 $11,335 $2,418 $1,011 3.31x FY21 $11,933 $2,159 $1,029 3.74x FY22 $12,616 $2,269 $1,133 3.71x FY23 $12,963 $4,959 $1,151 2.12x

Source: Company 10-K, Henry Fund Estimates

We expect that MCD will generate more than enough EBITDA to cover their debt obligations. We recognize that debt obligations increase significantly in FY23, but we still believe MCD is more than prepared to cover their obligations.

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Weight Average Cost of Capital

The weighted average cost of capital for MCD was lowered significantly due to the lower treasury yields that we are seeing today and the fact that MCD has over $31 billion in long term debt. Our calculated WACC was 4.28%.

Cost of Debt

The cost of debt was calculated using a yield information from a 30 year bond on FINRA. The current yield on that bond is 3.54%. This is rather typical for a cost of debt, and we felt that no adjustments needed to be made. Our after-tax cost of debt was calculated to be 2.68%, with a weight of debt equal to 16.5%.

Cost of Equity

With the yield curve inverting, the 10-year treasury yield was extremely low, because of this we felt that the 30-year treasury yield better represented the risk-free rate. In addition, MCD has a beta of 0.5.

The combination of a low risk-free rate with a low beta returns a rather low cost of equity. We calculated a cost of equity equal to 4.68%. In addition, our weight of equity is 83.5%.

Valuation

Discounted Cash Flow - $378

The DCF price is highly dependent on the discount rate and since we were worried about the accuracy of our discount rate we decided this model would not be the best model to choose.

As stated previously our WACC is calculated at 4.28%, our sensitivity tables show that a 100 bps raise in WACC (5.28%) would lower our DCF price from $378 down to $243. It should also be noted that a 100 bps change in WACC is as simple as moving the beta from 0.5 to 0.75, this change would result in a 100 bps raise to WACC.

An interesting note is that a target price of $243 would put us in line with other bullish analysts.

Dividend Discount Model - $313

MCD has paid a consistent dividend, however the dividend growth has not been consistent. Over the past 8 years MCD has had a quarterly dividend yield ranging from 1.3% -3.6%. MCD has experienced dividend growth of 4.8% - 9.4% over the past 4 years. Due to the uncertainty of dividend growth and yield we do not feel this model provides an accurate picture of what the company is worth.

In addition to inconsistent dividend growth this model also fell subject to the low discount rate bias and an arbitrary end year multiple was applied to the terminal value due to negative ROE in the CV year inhibiting our ability to calculate a CV year PE.

Relative Model - $253

The final model we used was a relative model. We ran both a relative PE model and a relative sales model with the peer group we defined in the above “Peer Comparison” section.

We decided a relative sales model didn’t accurately display MCD’s value because their store ownership transition has decreased sales (as expected). In this same time period MCD has become more profitable, and the sales they “lost” are only due to switching from company operated to franchised.

We ultimately decided that a relative price to earnings ratio allowed us to accurately value MCD. MCD trades beneath their peer group’s average FY19 PE and MCD is currently trading at the average FY19 EV/EBITDA ratio.

Summary

We believe that MCD is undervalued in the current market, we chose to base this opinion on various ratios and set our price target based on our relative model. Our valuation approach indicates that MCD has 25% upside.

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KEYS TO MONITOR

• It is crucial to monitor same store sales growth for MCD relative to the industry. If MCD begins to lag in comparison to competitors or if same store sales go negative, it would signal that MCD is no longer able to increase sales without increasing stores.

• Rental agreements and land prices are also vital for MCD. One third of MCD’s revenue comes from rent. With multiple franchisors becoming upset with MCD, it could pose a threat to rental agreements for MCD. In addition if land prices become expensive, MCD will be forced to take on more debt.

• Lastly, technology acquisitions should be monitored. We

believe the market expects MCD to have the first automated drive thru. If they do not achieve this goal it may signal that management is having problems leading initiatives.

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REFERENCES

1. MCD 10-K

2. Factset

3. Fee Structure https://www.businessinsider.com/what-it-costs-to-open-a-mcdonalds-2014-11

4. Self Service Kiosks https://www.inc.com/justin-bariso/mcdonalds-new-kiosks-will-change-fast-food-industry-forever.html

5. McD Tech Labs https://www.qsrmagazine.com/technology/acquires-another-tech-company

6. Dynamic Yield Acquisition https://news.mcdonalds.com/news-releases/news-release-details/dynamic-yield-acquisition-release

7. Plexure Investment https://news.mcdonalds.com/news-releases/news-release-details/mcdonalds-announces-investment-new-zealand-based-plexure

8. Apprente Acquisition https://news.mcdonalds.com/news-releases/news-release-details/McDonalds/acquire/apprente

9. Plant-Based Meats https://morningconsult.com/2019/05/15/fast-food-restaurants-look-to-turn-plant-based-burgers-into-cash-cows/

10. Franchisee Rent

https://www.amrock.com/mcdonalds-the-30-billion-real-estate-company/

11. MCD Remodel

https://www.qsrmagazine.com/finance/mcdonalds-slows-massive-remodel-program

12. Apprente Valuation

https://www.theburnin.com/startups/mcdonalds-acquires-ai-startup-apprente-launches-mcd-tech-labs/

13. Worker Salary Info

https://www.salary.com/research/salary/benchmark/fast-food-worker-salary

14. Average US Wage https://www.ssa.gov/oact/cola/central.html

15. CEO Change https://www.wsj.com/articles/mcdonalds-fires-ceo-steve-easterbrook-over-relationship-with-employee-11572816660

16. MCD All Day Breakfast https://www.chicagotribune.com/business/ct-biz-mcdonalds-reduce-all-day-breakfast-menu-items-20190515-story.html

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

McDonalds (MCD)Revenue Decomposition (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ECompany Operated SalesU.S. 3,743$             3,260$             2,665$             2,265$             2,072$             1,917$             1,821$             1,826$            # of Restaurants 1,132               842                  696                  577                  491                  427                  376                  357                 Revenue Per Restaurant 3.31$               3.87$               3.83$               3.92$               4.22$               4.49$               4.85$               5.11$              

International Lead Markets 4,279$             4,080$             3,962$             3,847$             3,760$             3,676$             3,593$             3,602$            # of Restaurants 1,096               900                  838                  780                  729                  685                  654                  638                 Revenue Per Restaurant 3.90$               4.53$               4.72$               4.93$               5.16$               5.36$               5.49$               5.64$              

High Growth Markets 5,378$             4,592$             2,848$             2,705$             2,597$             2,506$             2,456$             2,462$            # of Restaurants 2,887               1,118               1,072               1,018               978                  948                  939                  929                 Revenue Per Restaurant 1.86$               4.11$               2.66$               2.66$               2.66$               2.64$               2.62$               2.65$              

Foundational Markets & Corporate 1,896$             787$                539$                514$                499$                489$                482$                477$               # of Restaurants 620                  208                  213                  202                  196                  192                  188                  187                 Revenue Per Restaurant 3.06$               3.78$               2.53$               2.54$               2.54$               2.54$               2.56$               2.56$              

Total Company Operated Restaurants 5,736               3,068               2,819               2,578               2,394               2,253               2,157               2,111              Growth ‐46.52% ‐8.11% ‐8.56% ‐7.14% ‐5.88% ‐4.24% ‐2.15%

Total Company Operated 15,295$           12,719$           10,013$           9,331$             8,929$             8,588$             8,352$             8,367$            Growth ‐16.84% ‐21.28% ‐6.80% ‐4.32% ‐3.82% ‐2.75% 0.18%

Revenue Per Restaurant 2.67$               4.15$               3.55$               3.62$               3.73$               3.81$               3.87$               3.96$              Growth 55.48% ‐14.33% 1.92% 3.04% 2.19% 1.55% 2.38%

Franchised Revenue U.S. 4,510$             4,746$             5,001$             5,199$             5,444$             5,713$             5,972$             6,149$            # of Restaurants 13,023             13,194             13,218             13,284             13,351             13,391             13,411             13,424            Revenue Per Restaurant 0.35$               0.36$               0.38$               0.39$               0.41$               0.43$               0.45$               0.46$              

International Lead Markets 2,945$             3,260$             3,638$             4,065$             4,489$             4,949$             5,369$             5,675$            # of Restaurants 5,755               6,021               6,149               6,302               6,444               6,589               6,737               6,889              Revenue Per Restaurant 0.51$               0.54$               0.59$               0.65$               0.70$               0.75$               0.80$               0.82$              

High Growth Markets  783$                942$                1,141$             1,316$             1,553$             1,769$             1,904$             1,951$            # of Restaurants 2,665               4,766               5,233               5,746               6,309               6,877               7,221               7,437              Revenue Per Restaurant 0.29$               0.20$               0.22$               0.23$               0.25$               0.26$               0.26$               0.26$              

Foundational Markets & Corporate  1,089$             1,154$             1,232$             1,280$             1,325$             1,341$             1,341$             1,262$            # of Restaurants 9,721               10,192             10,436             10,671             10,884             11,102             11,268             11,437            Revenue Per Restaurant 0.11$               0.11$               0.12$               0.12$               0.12$               0.12$               0.12$               0.11$              

Total Franchised Restaurants 31,163             34,173             35,036             36,003             36,988             37,959             38,638             39,188            Growth 9.66% 2.53% 2.76% 2.74% 2.62% 1.79% 1.43%

Total Franchised Revenue  9,327$             10,102$           11,012$           11,860$           12,811$           13,771$           14,585$           15,038$          Growth 8.30% 9.01% 7.70% 8.02% 7.49% 5.91% 3.10%

Revenue Per Restaurant 0.30$               0.30$               0.31$               0.33$               0.35$               0.36$               0.38$               0.38$              Growth ‐1.24% 6.33% 4.80% 5.15% 4.75% 4.05% 1.65%

Systemwide Revenues U.S. 8,253$             8,006$             7,666$             7,463$             7,516$             7,630$             7,793$             7,975$            # of Restaurants 14,155             14,036             13,914             13,862             13,842             13,818             13,787             13,781            Revenue Per Restaurant 0.58$               0.57$               0.55$               0.54$               0.54$               0.55$               0.57$               0.58$              

International Lead Markets 7,223$             7,340$             7,600$             7,912$             8,249$             8,624$             8,962$             9,277$            # of Restaurants 6,851               6,921               6,987               7,082               7,173               7,274               7,392               7,527              Revenue Per Restaurant 1.05$               1.06$               1.09$               1.12$               1.15$               1.19$               1.21$               1.23$              

High Growth Markets  6,161$             5,533$             3,989$             4,021$             4,150$             4,275$             4,360$             4,414$            # of Restaurants 5,552               5,884               6,305               6,764               7,287               7,825               8,159               8,367              Revenue Per Restaurant 1.11$               0.94$               0.63$               0.59$               0.57$               0.55$               0.53$               0.53$              

Foundational Markets & Corporate  2,985$             1,941$             1,770$             1,795$             1,824$             1,830$             1,822$             1,739$            # of Restaurants 10,341             10,400             10,649             10,873             11,081             11,294             11,457             11,624            Revenue Per Restaurant 0.29$               0.19$               0.17$               0.17$               0.16$               0.16$               0.16$               0.15$              

Total Restaurants 36,899             37,241             37,855             38,581             39,382             40,212             40,795             41,299            Growth 0.93% 1.65% 1.92% 2.08% 2.11% 1.45% 1.24%

Total Revenues 24,622$           22,820$           21,025$           21,191$           21,740$           22,359$           22,937$           23,404$          Growth ‐7.32% ‐7.87% 0.79% 2.59% 2.85% 2.59% 2.04%

Revenue Per Restaurant 0.67$               0.61$               0.56$               0.55$               0.55$               0.56$               0.56$               0.57$              Growth ‐8.17% ‐9.36% ‐1.10% 0.50% 0.73% 1.12% 0.79%

McDonalds (MCD)Income Statement (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ESales by company‐operated restaurants 15,295                  12,719                  10,013             9,331               8,929               8,588               8,352               8,367              

Revenues from franchised restaurants 9,327                    10,102                  11,013             11,860             12,811             13,771             14,585             15,038            

Rent 6,108                   6,496                   7,082               7,472               8,071               8,400               8,751               8,722              

Royalty 3,130                   3,519                   3,886               4,269               4,740               5,371               5,834               6,316              

Intial Fee 89                         87                         44                    47                     51                     55                     58                     60                    

Total revenues 24,622                  22,820                  21,025             21,191             21,740             22,359             22,937             23,404            

Food & paper expense 4,897                    4,034                    3,154               2,437               2,391               2,348               2,294               2,340              Payroll & employee benefits expense 4,134                    3,529                    2,938               2,331               2,283               2,348               2,294               2,340              Occupancy & other operating expenses 3,432                    2,735                    2,064               1,883               1,795               1,795               1,788               1,769              Franchised restaurants ‐ occupancy expenses 1,718                    1,790                    1,973               2,013               2,087               2,169               2,248               2,294              Depreciation & Amortization Expense 1,517                    1,363                    1,482               1,501               1,527               1,561               1,596               1,629              

Selling, general & administrative expenses 2,385                    2,231                    2,200               2,119               2,065               1,990               1,927               1,931              Other operating expense (income), net 76                         (1,163)                   (237)                 (212)                 (217)                 (224)                 (229)                 (234)                Total operating costs & expenses 18,158                  14,519                  13,574             12,073             11,931             11,987             11,917             12,069            

Operating income 6,464                    8,302                    7,451               9,119               9,809               10,372             11,020             11,335            

Interest expense‐net of capitalized interest 885                       921                       981                   1,066               1,011               1,030               1,134               1,153              Nonoperating income (expense), net 6                            (58)                        (25)                    (32)                    (11)                    11                     23                     12                    Income before provision for income taxes 5,585                    7,322                    6,444               8,020               8,786               9,354               9,909               10,194            Provision for income taxes 2,180                    3,381                    1,892               1,949               2,135               2,273               2,408               2,477              Net income 3,406                    3,941                    4,553               6,071               6,651               7,081               7,501               7,717              

Weighted average shares outstanding‐basic 854                       807                       778                   767                   756                   747                   739                   731                  ‐                        ‐                        ‐                   

Year end shares outstanding 819                       794                       767                   756                   747                   739                   731                   724                  Net income (loss) per share‐basic 3.99$                    4.88$                    5.85$               8.04$               8.90$               9.58$               10.27$             10.66$            Dividends declared per common share 3.61$                    3.83$                    4.19$               4.69$               5.02$               5.30$               5.54$               5.70$              

McDonalds (MCD)Balance Sheet (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018  2019E   2020E   2021E   2022E   2023E Cash & equivalents 1,223         2,464         866            1,733     5,034     8,445     13,406   17,824  Accounts & notes receivable 1,474         1,976         2,442         2,649     2,772     2,862     2,947     3,019    Inventories, at cost, not in excess of market 59              59              51              48           40           34           33           33          Prepaid expenses & other current assets 565            828            695            664         626         599         584         579        Assets of business held for sale 1,527         ‐             ‐             ‐          ‐          ‐          ‐          ‐         Total current assets 4,849         5,327         4,053         5,094     8,473     11,941   16,971   21,456  Investments in & advances to affiliates 726            1,086         1,203         1,305     1,448     1,584     1,714     1,805    Goodwill 2,337         2,380         2,332         2,332     2,332     2,332     2,332     2,332    Miscellaneous assets 1,855         2,563         2,381         2,381     2,381     2,381     2,381     2,381    Total other assets 4,918         6,028         5,915         6,017     6,160     6,296     6,426     6,517    Net property & equipment 21,258       22,448       22,843       23,642   24,426   25,188   25,926   26,644  Total assets 31,024       33,804       32,811       34,753   39,059   43,425   49,323   54,617  

Accounts payable 756            925            1,208         2,119     1,739     1,498     1,491     1,498    Income taxes 267            266            228            234         256         273         289         297        Other taxes 266            275            254            256         263         271         278         283        Accrued interest 248            278            297            317         341         372         405         438        Accrued payroll & other liabilities 1,159         1,146         987            975         989         1,006     1,009     1,006    Current maturities of long‐term debt 77              ‐             ‐             ‐          2,418     2,159     2,269     4,959    Liabilities of businesses held for sale 695            ‐             ‐             ‐          ‐          ‐          ‐          ‐         Total current liabilities 3,468         2,891         2,974         3,902     6,007     5,578     5,740     8,482    Long‐term debt 25,879       29,536       31,075       32,811   33,710   37,106   41,254   41,925  Long‐term income taxes ‐             2,371         2,081         1,949     2,135     2,273     2,408     2,477    Deferred revenues ‐ initial franchise fees ‐             ‐             628            ‐          ‐          ‐          ‐          ‐         Other long‐term liabilities 2,064         1,154         1,096         1,081     1,087     1,096     1,090     1,053    Deferred income taxes 1,817         1,119         1,216         1,208     1,366     1,477     1,589     1,684    Total Liabilities  33,228       37,072       39,070       40,951   44,305   47,531   52,081   55,622  

Common stock & Additional Paid in Capital 6,775         7,089         7,393         7,695     7,998     8,301     8,603     8,906    Retained earnings 46,223       48,326       50,487       53,013   55,913   59,080   62,536   66,125  Accumulated other comprehensive income (loss) (3,093)        (2,178)        (2,610)        (2,610)    (2,610)    (2,610)    (2,610)    (2,610)   Common stock in treasury, at cost 52,109       56,504       61,529       64,297   66,548   68,877   71,288   73,426  Total shareholders' equity (deficit) (2,204)        (3,268)        (6,258)        (6,198)    (5,246)    (4,105)    (2,757)    (1,005)   Total Liabilities & Equity 31,024       33,804       32,811       34,753   39,059   43,425   49,323   54,617  

McDonalds (MCD)Cash Flow Statement (millions)

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E

Cash Flows From Operating Activities Net Income             6,071                6,651                7,081              7,501                 7,717 Deperciation and Amotization Expense             1,501                1,527                1,561              1,596                 1,629 Accounts & notes receivable (207)                (123)                 (90)                    (85)                  (72)                    Inventories, at cost, not in excess of market 4                      7                       6                       1                      (0)                      Prepaid expenses & other current assets 31                   38                     27                     15                   5                        Accounts payable 911                 (380)                 (241)                 (7)                    7                        Income taxes 6                      22                     17                     16                   8                        Other taxes 3                      7                       7                       7                      6                        Accrued interest 20                   24                     31                     33                   33                     Deferred income taxes (7)                    158                  111                   112                 95                     Deferred revenues ‐ initial franchise fees (628)                ‐                   ‐                    ‐                  ‐                    Accrued payroll & other liabilities (12)                  14                     17                     3                      (3)                      

Cash Flows From Operating Activities  7,692              7,946               8,526               9,192              9,425                

Cash Flows From Investing Activities Investments in & advances to affiliates (102)                (143)                 (136)                 (130)                (91)                    Other long‐term liabilities (16)                  6                       9                       (6)                    (36)                    Cap Ex (2,300)             (2,312)              (2,323)              (2,335)             (2,346)               Cash Flows From Investing Activities  (2,417)             (2,448)              (2,450)              (2,471)             (2,473)               

Cash Flows From Financing Activities Current maturities of long‐term debt ‐                2,418            (259)               110               2,690             Long‐term debt 1,736              899                  3,396               4,148              671                   Common stock & Additional Paid in Capital 303                 303                  303                   303                 303                   Common stock in treasury, at cost (2,769)             (2,250)              (2,329)              (2,411)             (2,139)               Dividends Paid  (3,545)             (3,751)              (3,914)              (4,045)             (4,129)               Long‐term income taxes (132)                186                  138                   135                 69                     Cash Flows From Financing Activities  (4,408)             (2,196)              (2,665)              (1,760)             (2,534)               

Increase (Decrease) in cash & equivalents 867                 3,301               3,411               4,961              4,418                Cash & equivalents at beginning of year 866                 1,733               5,034               8,445              13,406              

Cash & equivalents at end of year  1,733              5,034               8,445               13,406            17,824              

McDonalds (MCD)Cash Flow Statement (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018Net income 4,687                 5,192                     5,924              Depreciation & amortization 1,517                 1,363                     1,482              Deferred income taxes (539)                   (36)                         103                 Share‐based compensation 131                    118                        125                 Net gain on sale of restaurant businesses ‐                     (1,156)                    (309)                Other net income adjustments 97                      1,051                     114                 Accounts receivable (159)                   (341)                       (479)                Inventories, prepaid expenses & other current assets 28                      (37)                         (2)                    Accounts payable 90                      (60)                         129                 Income taxes 170                    (396)                       (33)                  Other accrued liabilities 38                      (146)                       (87)                  Net cash flows from operating activities 6,060                 5,551                     6,967              

Capital expenditures (1,821)                (1,854)                    (2,742)             Purchases of restaurant businesses (110)                   (77)                         (102)                Sales of restaurant businesses 976                    975                        531                 Proceeds from sale of businesses in China & Hong Kong ‐                     1,597                     ‐                  Sales of property 83                      167                        160                 Sales of restaurant businesses & property ‐                     ‐                         ‐                  Other investing activities (110)                   (246)                       (303)                Net cash flows from investing activities (982)                   562                        (2,455)             

Net short‐term borrowings (repayments) (286)                   (1,050)                    96                   Long‐term financing issuances 3,780                 4,728                     3,795              Long‐term financing repayments (823)                   (1,649)                    (1,760)             Treasury stock purchases (11,171)              (4,686)                    (5,208)             Common stock dividends (3,058)                (3,089)                    (3,256)             Proceeds from stock option exercises 299                    457                        403                 Excess tax benefit on share‐based compensation ‐                     ‐                         ‐                  Other financing activities (3)                       (21)                         (20)                  Net cash flows from financing activities (11,262)              (5,311)                    (5,950)             

Effect of exchange rates on cash & cash equivalents (104)                   264                        (160)                Cash & equivalents increase (decrease) (6,288)                1,066                     (1,598)             Cash balance of businesses held for sale at end of year (174)                   174                        ‐                  Cash & equivalents at beginning of year 7,686                 1,223                     2,464              Cash & equivalents at end of year 1,223                 2,464                     866                 Interest paid 874                    885                        960                 Income taxes paid 2,388                 2,786                     1,734              

McDonalds (MCD)Common Size Balance Sheet ( as % of Sales)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ECurrent Assets

Cash & equivalents 4.97% 10.80% 4.12% 8.18% 23.16% 37.77% 58.45% 76.16%Accounts & notes receivable 5.99% 8.66% 11.61% 12.50% 12.75% 12.80% 12.85% 12.90%Inventories, at cost, not in excess of market 0.24% 0.26% 0.24% 0.22% 0.18% 0.15% 0.15% 0.14%Prepaid expenses & other current assets 2.30% 3.63% 3.30% 3.13% 2.88% 2.68% 2.55% 2.48%Assets of business held for sale 6.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total current assets 19.69% 23.34% 19.28% 24.04% 38.97% 53.41% 73.99% 91.67%Investments in & advances to affiliates 2.95% 4.76% 5.72% 6.16% 6.66% 7.08% 7.47% 7.71%Total other assets 19.97% 26.42% 28.13% 28.39% 28.34% 28.16% 28.02% 27.85%Property & equipment, at cost 139.89% 160.50% 176.90% 0.00% 0.00% 0.00% 0.00% 0.00%Accumulated depreciation & amortization 53.55% 62.13% 68.26% 0.00% 0.00% 0.00% 0.00% 0.00%Net property & equipment 86.34% 98.37% 108.64% 111.56% 112.36% 112.65% 113.03% 113.84%Total assets 126.00% 148.13% 156.06% 164.00% 179.67% 194.22% 215.04% 233.36%Accounts payable 3.07% 4.05% 5.75% 10.00% 8.00% 6.70% 6.50% 6.40%Income taxes 1.09% 1.16% 1.09% 1.10% 1.18% 1.22% 1.26% 1.27%Other taxes 1.08% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21% 1.21%Accrued interest 1.01% 1.22% 1.41% 1.50% 1.57% 1.66% 1.76% 1.87%Accrued payroll & other liabilities 4.71% 5.02% 4.69% 4.60% 4.55% 4.50% 4.40% 4.30%Liabilities of businesses held for sale 2.82% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total current liabilities 14.09% 12.67% 14.14% 18.41% 27.63% 24.95% 25.03% 36.24%Long‐term debt 105.10% 129.43% 147.80% 154.83% 155.06% 165.96% 179.86% 179.13%Long‐term income taxes 0.00% 10.39% 9.90% 9.20% 9.82% 10.17% 10.50% 10.58%Deferred revenues ‐ initial franchise fees 0.00% 0.00% 2.99% 0.00% 0.00% 0.00% 0.00% 0.00%Other long‐term liabilities 8.38% 5.06% 5.21% 5.10% 5.00% 4.90% 4.75% 4.50%Deferred income taxes 7.38% 4.91% 5.78% 5.70% 6.29% 6.61% 6.93% 7.20%Total Liabilities  134.95% 162.45% 185.82% 193.25% 203.80% 212.58% 227.06% 237.65%Common stock 27.51% 31.06% 35.16% 36.31% 36.79% 37.12% 37.51% 38.05%Retained earnings ‐12.56% ‐9.55% ‐12.41% ‐12.31% ‐12.00% ‐11.67% ‐11.38% ‐11.15%Accumulated other comprehensive income (loss) 211.63% 247.60% 292.64% 303.41% 306.11% 308.05% 310.80% 313.73%Common stock in treasury, at cost ‐8.95% ‐14.32% ‐29.77% ‐29.25% ‐24.13% ‐18.36% ‐12.02% ‐4.29%Total shareholders' equity (deficit) 126.00% 148.13% 156.06% 164.00% 179.67% 194.22% 215.04% 233.36%

McDonalds (MCD)Common Size Income Statement

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ESales by company‐operated restaurants 62.12% 55.73% 47.62% 44.03% 41.07% 38.41% 36.41% 35.75%

Revenues from franchised restaurants 37.88% 44.27% 52.38% 55.97% 58.93% 61.59% 63.59% 64.25%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Food & paper expense 32.02% 31.71% 31.50% 26.12% 26.78% 27.34% 27.46% 27.97%

Payroll & employee benefits expense 27.03% 27.74% 29.34% 24.98% 25.57% 27.34% 27.46% 27.97%

Occupancy & other operating expenses 22.44% 21.51% 20.61% 20.18% 20.11% 20.90% 21.41% 21.14%

Franchised restaurants ‐ occupancy expenses 6.98% 7.84% 9.39% 9.50% 9.60% 9.70% 9.80% 9.80%

Selling, general & administrative expenses 9.68% 9.78% 10.46% 10.00% 9.50% 8.90% 8.40% 8.25%

Other operating expense (income), net 0.31% ‐5.10% ‐1.13% ‐1.00% ‐1.00% ‐1.00% ‐1.00% ‐1.00%

Total operating costs & expenses 73.75% 63.62% 64.56% 56.97% 54.88% 53.61% 51.95% 51.57%

Operating income 26.25% 36.38% 35.44% 43.03% 45.12% 46.39% 48.05% 48.43%

Interest expense‐net of capitalized interest 3.59% 4.04% 4.67% 5.03% 4.65% 4.61% 4.95% 4.93%

Nonoperating income (expense), net 0.03% ‐0.25% ‐0.12% ‐0.15% ‐0.05% 0.05% 0.10% 0.05%

Income before income taxes ‐ United States (U.S.) 8.36% 9.82% 10.55% 0.00% 0.00% 0.00% 0.00% 0.00%

Income before income taxes ‐ outside the U.S. 19.52% 27.74% 26.63% 0.00% 0.00% 0.00% 0.00% 0.00%

Income before provision for income taxes 22.68% 32.09% 30.65% 37.85% 40.42% 41.83% 43.20% 43.56%

Provision for income taxes 8.85% 14.82% 9.00% 9.20% 9.82% 10.17% 10.50% 10.58%

Net income 13.83% 17.27% 21.65% 28.65% 30.60% 31.67% 32.70% 32.97%

McDonalds (MCD)Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 2.12%Equity Risk Premium 4.95%Beta 0.50Cost of Equity 4.60%

Pre Tax Cost of Debt 3.54%Marginal Tax Rate 24.30%After Tax Cost of Debt 2.68%

Total Shares Outstanding 767.10                              Share Price $194.00Value of Equity $148,817.40

Current Portion of LT debt and ST debt  ‐                                    Long‐Term Debt 31,075.30                        PV of Operating Leases 9,699.68                          Value of Debt 31,075.30                        

Total Value $179,892.70Weight of Equity 82.73%Weight of Debt 17.27%

Weighted Cost of Equity 3.80%Weighted Cost of Debt 0.46%WACC 4.26%

McDonalds (MCD)Value Driver Estimation (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ERevenue  $    24,622.00  $    22,820.40  $    21,025.20  $     21,191.21  $    21,739.90  $    22,359.06  $    22,937.09  $    23,404.32Less Food & paper expense  $      4,896.90  $      4,033.50  $      3,153.80  $       2,436.99  $      2,391.39  $      2,347.70  $      2,293.71  $      2,340.43Less Payroll & employee benefits expense  $      4,134.20  $      3,528.50  $      2,937.90  $       2,331.03  $      2,282.69  $      2,347.70  $      2,293.71  $      2,340.43Less Occupancy & other operating expenses  $      3,431.96  $      2,735.29  $      2,063.84  $       1,883.27  $      1,795.17  $      1,794.78  $      1,787.90  $      1,769.13Less Franchised restaurants ‐ occupancy expenses  $      1,718.40  $      1,790.00  $      1,973.30  $       2,013.16  $      2,087.03  $      2,168.83  $      2,247.84  $      2,293.62Less Depreciation & Amortization   $      1,516.50  $      1,363.40  $      1,482.00  $       1,500.92  $      1,527.13  $      1,561.30  $      1,596.36  $      1,628.73Less Selling, general & administrative expenses  $      2,384.50  $      2,231.30  $      2,200.20  $       2,119.12  $      2,065.29  $      1,989.96  $      1,926.72  $      1,930.86Less Other operating expense (income), net  $            75.70  $    (1,163.20  $        (236.80  $         (211.91  $        (217.40  $        (223.59  $        (229.37  $        (234.04Plus Implied Interest on Operating Leases (3.54%  $          350.30 $          333.55 $          343.37 $           351.51 $          358.84 $          365.58 $          376.29 $          386.71EBITA  $      6,814.14  $      8,635.16  $      7,794.33  $       9,470.13  $    10,167.44  $    10,737.96  $    11,396.53  $    11,721.86Tax AdjustmentIncome Tax Expense  $      2,179.50  $      3,381.20  $      1,891.80  $       1,948.98  $      2,135.10  $      2,272.99  $      2,407.81  $      2,477.12Marginal Tax Rate 31.70% 39.40% 24.30% 24.30% 24.30% 24.30% 24.30% 24.30%Plus Tax Shield on Interest Expense  $          280.48 $          362.99 $          238.43 $           259.13 $          245.75 $          250.22 $          275.68 $          280.16Plus Tax Shield on interest of Operating Leases  $          111.05 $          131.42 $            83.44  $             85.42  $            87.20  $            88.84  $            91.44  $            93.97

Less Total Adjusted Tax  $      2,571.03  $      3,875.61  $      2,213.67  $       2,293.52  $      2,468.05  $      2,612.04  $      2,774.93  $      2,851.26Plus Change In Deferred Tax  $          112.80 $        (697.70  $            96.10  $             (7.14  $          158.10 $          110.98 $          111.71 $            95.29NOPLAT  $      4,355.92  $      4,061.85  $      5,676.76  $       7,169.48  $      7,857.50  $      8,236.90  $      8,733.31  $      8,965.89Invested Capital   $                   ‐   $                   ‐   $                    ‐ Plus Normal Cash (5% of sales)  $      1,231.10  $      1,141.02  $      1,051.26  $       1,059.56  $      1,086.99  $      1,117.95  $      1,146.85  $      1,170.22Plus Accounts Recievable   $      1,474.10  $      1,976.20  $      2,441.50  $       2,648.90  $      2,771.84  $      2,861.96  $      2,947.42  $      3,019.16Plus Inventories 58.90$            58.80$            51.10$            47.59$             40.18$            34.35$            33.41$            33.47$            Plus Prepaid expenses & other current assets  565.20$          828.40$          694.60$          663.99$           626.39$          599.33$          583.93$          579.32$         Non‐Interest Bearing Current Operating Assets  3,329.30$       4,004.42$       4,238.46$       4,420.04$        4,525.40$       4,613.60$       4,711.60$       4,802.16$       Less Accounts Payable 756.00$          924.80$          1,207.90$       2,119.12$        1,739.19$       1,498.06$       1,490.91$       1,497.88$      Less Income taxes 267.20$           265.80$           228.30$           233.88$            256.21$           272.76$           288.94$           297.25$          Less Other taxes 266.30$           275.40$           253.70$           256.41$            263.05$           270.54$           277.54$           283.19$          Less Accrued payroll & other liabilities 1,159.30$       1,146.20$       986.60$           974.80$            989.17$           1,006.16$       1,009.23$       1,006.39$      Non‐Interest Bearing Current Operating Liabilities 2,448.80$       2,612.20$       2,676.50$       3,584.21$        3,247.62$       3,047.52$       3,066.62$       3,084.71$      Net Operating Working Capital 880.50$          1,392.22$       1,561.96$       835.84$           1,277.78$       1,566.08$       1,644.99$       1,717.45$      Net property, plant & equipment 21,257.60$     22,448.30$     22,842.70$     23,641.78$      24,426.15$     25,187.91$     25,926.22$     26,643.83$    Plus PV of Operating Leases 9,895.49$       9,422.24$       9,699.68$       9,929.55$        10,136.85$     10,327.04$     10,629.75$     10,923.97$    Plus Misc. Assets 1,855.30$       2,562.80$       2,381.00$       2,381.00$        2,381.00$       2,381.00$       2,381.00$       2,381.00$      Plus Net Other Operating Asses        33,008.39        34,433.34        34,923.38         35,952.33        36,944.00        37,895.95        38,936.97        39,948.81Less Other Long Term Liabilities 2,064.30         1,154.40         1,096.30         1,080.75          1,086.99         1,095.59         1,089.51         1,053.19        Invested Capital         31,824.59        34,671.16        35,389.04         35,707.41        37,134.79        38,366.44        39,492.44        40,613.06WACC 4.26% 4.26% 4.26% 4.26% 4.26% 4.26% 4.26% 4.26%Beginning Invested Capital 33,516.41$     31,824.59$     34,671.16$     35,389.04$      35,707.41$     37,134.79$     38,366.44$     39,492.44$    Change in Invested Capital (1,691.82)$     2,846.57$       717.88$           318.37$            1,427.37$       1,231.65$       1,126.00$       1,120.62$      Ending Invested Capital 31,824.59$     34,671.16$     35,389.04$     35,707.41$      37,134.79$     38,366.44$     39,492.44$     40,613.06$    ROIC ( NOPLAT/Beginning IC) 13.00% 12.76% 16.37% 20.26% 22.01% 22.18% 22.76% 22.70%FCF ( NOPLAT ‐ Change in IC) 6,047.73$       1,215.28$       4,958.88$       6,851.11$        6,430.12$       7,005.25$       7,607.31$       7,845.27$      EP (Beginning IC * ( ROIC ‐ WACC )) 2,926.73$       2,704.80$       4,198.33$       5,660.43$        6,334.88$       6,653.41$       7,097.31$       7,281.87$      

NOPLAT: 4,355.92         4,061.85         5,676.76         7,169.48          7,857.50         8,236.90         8,733.31         8,965.89        Less: change in IC (IC1‐IC0): (1,691.82)        2,846.57         717.88             318.37              1,427.37         1,231.65         1,126.00         1,120.62        FCF: 6,047.73         1,215.28         4,958.88         6,851.11          6,430.12         7,005.25         7,607.31         7,845.27        

NOPLAT: 4,355.92         4,061.85         5,676.76         7,169.48          7,857.50         8,236.90         8,733.31         8,965.89        IC0: 33,516.41       31,824.59       34,671.16       35,389.04        35,707.41       37,134.79       38,366.44       39,492.44      ROIC: 13.00% 12.76% 16.37% 20.26% 22.01% 22.18% 22.76% 22.70%

IC0: 33,516.41       31,824.59       34,671.16       35,389.04        35,707.41       37,134.79       38,366.44       39,492.44      Multiplied by: (ROIC‐ WACC) : 8.73% 8.50% 12.11% 15.99% 17.74% 17.92% 18.50% 18.44%EP: 2,926.73         2,704.80         4,198.33         5,660.43          6,334.88         6,653.41         7,097.31         7,281.87        

McDonalds (MCD)Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 2.04%     CV ROIC 22.70%     WACC 4.26%     Cost of Equity 4.60%CV ROE ‐767.90%

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E1 2 3 4 4

DCF Model

NOPLAT        7,169.48       7,857.50       8,236.90        8,733.31         8,965.89 Cap ex (Change in IC)            318.37       1,427.37       1,231.65        1,126.00         1,120.62 FCF        6,851.11       6,430.12       7,005.25        7,607.31         7,845.27 CV 366,445.74   Discount Factor 1.0426 1.0871 1.1335 1.1818 1.1818PV of FCF 6,570.91       5,914.93     6,180.42     6,437.11      310,076.98  

Value of Operating Assets  335,180.34  

EP Model

Economic Profit 5,660.43         6,334.88      6,653.41      7,097.31      7,281.87        CV 326,953.30   Discount Factor 1.0426            1.0871          1.1335          1.1818          1.1818           PV  5,428.93         5,827.31      5,870.02      6,005.56      276,659.49   Sum of PV's 299,791.30   Beg IC 35,389.04     

Value of Operating Assets 335,180.34  

Excess Cash 365Value of Non‐Operating Assets 365

Long Term Debt 32,811.20     ESOP  1,258.89        Other Long Term Liabilties  1,096.30        PV of Operating Leases  9,699.68        Value of Non‐Operating Liabilties  44,866.07     

Value of Equity 290,679.64   Next FYE 12/31/2019Shares Outstanding 767.10            Last FYE 12/31/2018Intrinsic Value ( As of 12/31) 378.93            Days in FY 365               Adjustment 387.14            Days to FYE 325               

McDonalds (MCD)Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2019E 2022E 2021E 2022E 2023CV

EPS 8.04$       8.90$       9.58$       10.27$     10.66$      

Key Assumptions   CV growth 2.04%   CV ROE ‐767.90%   Cost of Equity 4.60%

Future Cash Flows     P/E Multiple (CV Year) 27.00             EPS (CV Year) 10.66             Future Stock Price     Dividends Per Share 4.69          5.02          5.30          5.54          5.70          

Discount Period 1.00          2.00          3.00          4.00          4.00          Discount Factor 1.05          1.09          1.14          1.20          1.20          

     Discounted Cash Flows 4.487$     4.590$     4.630$     4.625$     287.749$  7.00% 5.50% 4.50% 3.00%

Intrinsic Value( As of 12/31) 306.08$     Adjustment  317.65$     

McDonalds (MCD)Key Management Ratios

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Liquidity RatiosQuick Ratio (CA ‐ Cash)/CL 1.05          0.99          1.07          0.86              0.57          0.63          0.62          0.43         Current Ratio ( CA/CL) 1.40          1.84          1.36          1.31              1.41          2.14          2.96          2.53         Cash Ratio (Cash/CL) 0.35          0.85          0.29          0.44              0.84          1.51          2.34          2.10         Operaing Cash Flow Ratio (OCF/CL) 1.75          1.92          2.34          1.97              1.32          1.53          1.60          1.11         

Activity or Asset‐Management RatiosReceivable Turnover ( Sales / AR) 16.70       11.55       8.61          8.00              7.84          7.81          7.78          7.75         Total Asset Turnover ( Sales/TA) 0.79          0.68          0.64          0.61              0.56          0.51          0.47          0.43         Net WC Turnover (Sales/NWC) 17.84    9.37      19.47    17.78        8.82       3.51       2.04       1.80      

Financial Leverage RatiosDebt to Equity ( TL / TE) (15.07)      (11.34)      (6.24)        (6.61)             (8.45)         (11.58)       (18.89)       (55.35)      Equity Multiplier  ( TA/TE) (14.07)      (10.34)      (5.24)        (5.61)             (7.45)         (10.58)       (17.89)       (54.35)      Debt to Asset ( TL /TA)  1.07          1.10          1.19          1.18              1.13          1.09          1.06          1.02         Debt to EBITDA  3.24          3.06          3.48          3.09              2.97          3.11          3.27          3.23         

Profitability RatiosReturn on Asset (NI/TA) 10.98% 11.66% 13.88% 17.47% 17.03% 16.31% 15.21% 14.13%Gross Margin ((Sales‐COGS)/Sales) 42.40% 47.03% 51.83% 59.11% 60.64% 61.27% 62.41% 62.64%Operating Margin (EBIT/ Sales) 26.25% 36.38% 35.44% 43.03% 45.12% 46.39% 48.05% 48.43%Net Profit Margin (Net Income/Sales) 13.83% 17.27% 21.65% 28.65% 30.60% 31.67% 32.70% 32.97%

Payout Policy RatiosDividend Payout Ratio (Dividend/EPS) 90.56% 78.46% 71.62% 58.39% 56.40% 55.27% 53.92% 53.50%Total Payout Ratio ((Div + Repurchase)/ 303.62% 149.74% 142.86% 104.00% 90.23% 88.17% 86.06% 81.22%

McDonalds (MCD)Relative Valuation Models

EPS EPSTicker Company Price 2019E 2020E P/E19 P/E20 P/S 19 P/S20 EV/EBITDAYUM Yum! Brands $112.99 $3.88  $4.24  26.4          26.0          6.18             5.95             22.27         QSR Restaurant Brands Intl. $69.92 $2.72  $2.99  24.4          23.4          3.19             3.03             15.08         DPZ Domino's Pizza $240.46 $9.49  $10.87  27.1          22.1          2.74             2.53             20.43         WEN Wendy's Company $20.01 $0.63  $0.77  35.1          26.0          2.72             2.59             19.59         CMG Chipotle Mexican Grill $818.83 $13.35  $17.23  55.9          47.5          4.13             3.68             34.42         RRGB Red Robin $31.95 $0.99  $0.96  32.2          33.2          0.32             0.32             9.86           JACK Jack In The Box $90.45 $4.37  $4.82  19.4          18.8          2.45             2.40             12.72         

Average 31.5          28.1          3.1               2.9               19.2           Median 27.1          26.0                         2.7                 2.6  19.6           

MCD McDonalds (MCD) $194.00          8.04           8.90  24.1          21.8          28.0 29.1 19.71

Implied Value:   Relative P/E (EPS19)  $  253.11    Relative P/E (EPS20) 250.56$  

Relative P/S 19 87.07$    Relative P/S 20 85.22$    

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016)

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending  Leases2019 1145 2018 1152 2017 13032020 1083 2019 1087 2018 12002021 1001 2020 997 2019 11032022 909 2021 904 2020 10012023 831 2022 805 2021 892Thereafter 7297 Thereafter 6912 Thereafter 6754Total Minimum Payments 12266 Total Minimum Payments 11857 Total Minimum Payments 12253Less: Interest 2566 Less: Interest 2435 Less: Interest 2358PV of Minimum Payments 9700 PV of Minimum Payments 9422 PV of Minimum Payments 9895

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.54% Pre‐Tax Cost of Debt 3.54% Pre‐Tax Cost of Debt 3.54%Number Years Implied by Year 6 Payment 8.8 Number Years Implied by Year 6 Payment 8.6 Number Years Implied by Year 6 Payment 7.6

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 1145 1105.9 1 1152 1112.6 1 1303 1258.52 1083 1010.2 2 1087 1013.9 2 1200 1119.33 1001 901.8 3 997 898.2 3 1103 993.74 909 790.9 4 904 786.6 4 1001 871.05 831 698.3 5 805 676.5 5 892 749.66 & beyond 831 5192.6 6 & beyond 805 4934.4 6 & beyond 892 4903.4PV of Minimum Payments 9699.7 PV of Minimum Payments 9422.2 PV of Minimum Payments 9895.5

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  16.6Average Time to Maturity (years): 6.20Expected Annual Number of Options Exercised: 2.677

Current Average Strike Price: 113.06$                 Cost of Equity: 4.60%Current Stock Price: $194.00

2019E 2020E 2021E 2022E 2023EIncrease in Shares Outstanding: 2.68 2.68 2.68 2.68 2.68Average Strike Price: 113.06$                  113.06$               113.06$               113.06$                 113.06$              Increase in Common Stock Account: 302.71                    302.71                 302.71                 302.71                   302.71                

Change in Treasury Stock 2,769 2,250 2,329 2,411 2,139Expected Price of Repurchased Shares: 194.00$                  202.91$               212.24$               221.99$                 232.19$              Number of Shares Repurchased: 14                            11                         11                        11                           9                          

Shares Outstanding (beginning of the year) 767.10 755.51 747.09 738.80 730.61Plus: Shares Issued Through ESOP 2.68 2.68 2.68 2.68 2.68Less: Shares Repurchased in Treasury 14.27 11.09 10.97 10.86 9.21Shares Outstanding (end of the year) 755.51 747.09 738.80 730.61 724.08

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol MCDCurrent Stock Price $194.00Risk Free Rate 2.12%Current Dividend Yield 2.16%Annualized St. Dev. of Stock Returns 21.06%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted65.01 ‐ 81.55 16.60                   113.06 6.20 75.84$         1,259$                  Total 16.60                   113.06$      6.20 97.74$         1,258.89$