DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 25 June 2019 Americas/United States Equity Research Restaurants McDonald’s Corporation (MCD) Rating OUTPERFORM Price (21-Jun-19, US$) 204.26 Target price (US$) 230.00 52-week price range (US$) 205.48 - 155.41 Market cap(US$ m) 155,951 Enterprise value (US$ m) 189,013 Target price is for 12 months. Research Analysts Lauren Silberman 212 325 2720 [email protected]INITIATION Hamburglar Positioned to Steal Share; Initiate Outperform ■ We initiate coverage of McDonald’s (MCD) with an Outperform rating and a $230 target price. Recent asset and technology investments support a more modernized MCD, and we believe the company is effectively expanding its competitive moat relative to peers. SSS represent the greatest source of upside to shares, with MCD’s slate of on-trend sales initiatives supporting outperformance. Healthy SSS, defensive characteristics and transition to ~95% franchised support the current premium valuation. ■ US Sales Outperformance to Continue: Sales initiatives are starting to gain traction, and should drive SSS of 4.5% in 2019 and ~3% LT. We expect momentum to continue with contributions from: 1) delivery (new terms with Uber Eats); 2) digital (recent acq. of Dynamic Yield highlights digitized focus); 3) Experience of the Future (EOTF) as a net positive; 4) an improved value strategy with a shift to more localized marketing; and 5) a return to breakfast share gains with local value and focus on improved service times. The potential launch of plant-based protein could represent upside to estimates. ■ Digital Supports Future Gains: MCD’s recent investments in consumer- facing technology suggest a long-term strategy to develop an integrated digital infrastructure. With the acquisition of Dynamic Yield, MCD has unlocked access to innovative tech and talent, customer data, and incremental revenue channels over time. MCD has already indicated the potential for customer recognition at the drive-thru as an example of the future of convenience. We believe MCD has the potential to become a digital leader in the space, with far- reaching benefits long-term as demonstrated by leaders in the pizza and coffee segments. ■ Valuation: Our $230 target price is based on ~18x our NTM EBITDA in 12 months (3-year avg ~14.5x), and implies ~26x our NTM EPS in 12 months (3- year avg ~21.5x), in-line with current multiples. Key risks: competition, consumer spending, FX volatility. Share price performance On 21-Jun-2019 the S&P 500 INDEX closed at 2950.46 Daily Jun22, 2018 - Jun21, 2019, 06/22/18 = US$164.55 Quarterly EPS Q1 Q2 Q3 Q4 2018A 1.79 1.99 2.16 1.97 2019E 1.72 2.06 2.22 2.03 2020E 1.94 2.21 2.40 2.19 Financial and valuation metrics Year 12/18A 12/19E 12/20E 12/21E EPS (CS adj.) (US$) 7.90 8.03 8.74 9.45 Prev. EPS (US$) - - - - P/E rel. (%) 144.7 147.3 150.5 152.6 Revenue (US$ m) 21,025.1 21,041.9 21,614.0 22,185.8 EBITDA (US$ m) 10,579.6 10,759.2 11,280.4 11,795.0 OCFPS (US$) 8.87 10.53 10.93 11.79 P/OCF (x) 20.0 19.4 18.7 17.3 EV/EBITDA (current) 17.6 17.3 16.5 15.8 Net debt (US$ m) 30,209 33,062 34,851 35,822 ROIC (%) 29.13 28.19 29.01 30.51 Number of shares (m) 763.49 IC (current, US$ m) 23,950.90 BV/share (Next Qtr., US$) 74.7 Dividend (current, US$) 4.64 Net debt (Next Qtr., US$ m) 31,610.1 Net debt/tot eq (Next Qtr.,%) -432.3 Source: Company data, Refinitiv, Credit Suisse estimates
Transcript
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
25 June 2019 Americas/United States
Equity Research Restaurants
McDonald’s Corporation (MCD)
Rating OUTPERFORM Price (21-Jun-19, US$) 204.26 Target price (US$) 230.00 52-week price range (US$) 205.48 - 155.41 Market cap(US$ m) 155,951 Enterprise value (US$ m) 189,013 Target price is for 12 months.
Number of shares (m) 763.49 IC (current, US$ m) 23,950.90 BV/share (Next Qtr., US$) 74.7 Dividend (current, US$) 4.64 Net debt (Next Qtr., US$ m) 31,610.1 Net debt/tot eq (Next Qtr.,%) -432.3 Source: Company data, Refinitiv, Credit Suisse estimates
McDonald's Corporation is the world's leading global foodservice retailer, with over 37,000 restaurants in more than 100 countries serving locally relevant menus at various price points.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (US$) 260.00
Our $260 one-year valuation in a blue sky scenario is based on an EV/EBITDA of ~19x our blue sky FY20 EBITDA. Our blue sky FY20 EBITDA is based on: 1) US SSS of 6.5% and 2) operating margins of ~47%. We believe US SSS momentum and market share gains translating to higher EBITDA and EPS growth would support a more narrow valuation gap relative to peers
Our Grey Sky Scenario (US$) 175.00
Our $175 one-year valuation in a grey sky scenario is based on an EV/EBITDA of ~15 our grey sky FY20 EBITDA. Our grey sky FY20 EBITDA is based on: 1) SSS of 1.5% and 2) operating margins of ~43%. A slowdown in the US business would pressure EBITDA and EPS growth.
Share price performance
On 21-Jun-2019 the S&P 500 INDEX closed at 2950.46
McDonald’s overall sales, above average relative to
sandwich peers.
Figure 17: McDonald’s maintains the greatest
market share of breakfast relative to select peers.
Source: Company data, Restaurant Research Journal, Credit Suisse estimates Source: Company data, Restaurant Research Journal, Technomic, Credit Suisse estimates
Based on McDonald’s ~25-30% breakfast sales mix, we estimate every 1% change in the
breakfast sales mix would impact the overall US comp by ~0.3%. A 1% change in
McDonald’s breakfast sales would also impact peer breakfast sales by ~0.5% and overall
peer sales by ~0.1%. Among peers, Starbucks and Dunkin’ face the greatest potential
impact relative to others given greater sales mixes skewed towards the breakfast daypart.
Figure 18: Impact of change in breakfast sales on
McDonald’s US SSS at a range of breakfast sales
mixes.
Figure 19: Impact of change in breakfast sales on
total QSR breakfast peer sales at a range of
McDonald’s breakfast sales mixes.
Source: Company data, Technomic, Credit Suisse estimates Source: Company data, Technomic, Credit Suisse estimates
0%
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### 25% 26% 27% 28% 29% 30%
1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
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3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
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5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.6%
6% 0.6% 0.6% 0.6% 0.6% 0.7% 0.7%
SSS Impact on Breakfast Peers
MCD Breakfast Sales Mix
Ch
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1% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
2% 0.5% 0.5% 0.5% 0.6% 0.6% 0.6%
3% 0.8% 0.8% 0.8% 0.8% 0.9% 0.9%
4% 1.0% 1.0% 1.1% 1.1% 1.2% 1.2%
5% 1.3% 1.3% 1.4% 1.4% 1.5% 1.5%
6% 1.5% 1.6% 1.6% 1.7% 1.7% 1.8%
SSS Impact on McDonald's US
MCD Breakfast Sales Mix
Ch
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cD
onald
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Bre
akfa
st
Sale
s
McDonald’s has historically indicated
every six seconds saved at the drive thru
could impact unit sales by 1%
A 1% change in McDonald’s breakfast
share would impact comp by ~0.3%
25 June 2019
McDonald’s Corporation (MCD) 13
Potential for New Product Innovation with Plant-Based Protein
In April, Burger King announced a test with Impossible Foods using plant-based protein for
a variation of its signature Whopper. Following extremely strong early test results (our
industry checks suggest ~20% sales lifts in April in test), Burger King indicated plans to roll
out the Impossible Whopper nationwide. Discussions with A&W Canada franchisees
suggest similar results upon roll-out of the Beyond Meat burger. We believe these plant-
based proteins with a high degree of similarity to traditional beef patties could unlock
significant growth opportunities for incremental customers and occasions. While
McDonald’s has not announced an intention to test or roll out a plant-based protein patty,
we anticipate it is likely near-term. Former McDonald’s CEO, Don Thompson, is on the
Board of Beyond Meat and we expect the two could leverage the relationship for product
integration. Following the discontinuation of the Signature Crafted Line, we believe the
launch of a plant-based protein burger could complement the premium side of the menu.
We anticipate top considerations for McDonald’s relate to increased complexity and
capacity constraints. McDonald’s has increased focus on service times in 2019, and the
addition of Beyond patties would increase complexity and likely cook times. We also think
there could be a capacity constraint and inability of Beyond to fulfill demand.
Based on our estimates, the addition of a Beyond Burger could generate a SSS lift of 4.5%
in a single store, based on the assumption a store sells 75 units per day with
incrementality of 75%. In a more aggressive scenario, we assume a McDonald’s store
could sell 150 units per day at 80% incrementality, which would generate a sales lift of
nearly 10%.
Figure 20: We estimate the roll-out of the Beyond
Burger could contribute ~450bps of SSS per store in
a base-case scenario.
Figure 21: In a bull-case scenario assuming 150
Beyond Burgers are sold per day and it is ~80%
incremental, it could generate a sales lift of nearly
10%.
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
From a system perspective, we do not expect a full-scale roll-out near-term, and Beyond is
unlikely to be able to fulfill capacity across the system. With a full-scale national roll-out,
we estimate McDonald’s would need nearly ~7MM pounds per month with 75 burgers sold
per day across the US system’s ~14K stores. Assuming Beyond Meat has capacity for
~8MM pounds per month in total, it would be unable to do a national roll-out near-term.
We note our optimistic scenario of 150 Beyond Burgers sold per day would require nearly
14 pounds of product per month.
While vegetarian options have been offered across different QSR chains for several years,
a plant-based protein that closely mimics actual meat appears to target a different
customer and occasion seeking an alternative to meat.
Beyond Burger Impact Per Store
McDonald's US AUV ($000s) $2,700
# Beyond Burgers Sold 75
Price/Burger $6
Daily Beyond Burger Sales $450
Annualized Beyond Burger Sales ($000s) $162.0
% Incremental 75%
Incremental Sales ($000s) $121.5
% Sales Lift 4.5%
Beyond Burger as % of Sales 5.7%
Beyond Burger Impact Per Store
McDonald's US AUV ($000s) $2,700
# Beyond Burgers Sold 150
Price/Burger $6
Daily Beyond Burger Sales $908
Annualized Beyond Burger Sales ($000s) $326.7
% Incremental 80%
Incremental Sales ($000s) $262.7
% Sales Lift 9.7%
Beyond Burger as % of Sales 10.8%
Increased complexity and capacity
constraints are headwinds in the roll-
out of a plant-based protein
25 June 2019
McDonald’s Corporation (MCD) 14
For reference, A&W Canada and TGI Friday’s both launched plant-based proteins with
Beyond Burger, which was the fastest-growing product launch in the history of both
companies. Based on feedback from select A&W Canada franchisees, the Beyond Burger
attracted incremental customers and helped double overall burger volume in their
restaurants. In 2018, A&W Canada generated system SSS of ~10%, with Beyond Burger
contributing to the strong growth.
The growth in the meat alternative channel suggests it is more than just a fad, with meat
alternatives (including traditional vegetarian options such as Morningstar) now worth
~$615MM in retail channels, a ~25% increase over the last three years.
Figure 22: Plant-based meat alternatives intended to
mimic meat have been gaining share within the
overall meat-alternative category in retail channels,
suggesting increasing consumer demand.
Figure 23: Foodservice sales at Beyond Meat
(distributes to ~12K restaurants) have accelerated
as the company seeks to keep up with demand.
Source: Nielsen xAOC, Credit Suisse estimates
Note: Reflects market share within the “All Other Manufacturers” channel in Nielsen’s Meat Alternatives category. We estimate Beyond Meat and Impossible Foods represent the majority of the channel.
Source: Beyond Meat
Reducing service times to unlock sales
Improved service times can unlock sales, particularly at breakfast. Based on discussions
with franchisees and commentary from McDonald’s historically, every 5-10 second
reduction in service times translates to ~100bps in comp. Over the last 18 years, service
times at the drive-thru have increased ~60%, with nearly all of the increase over the last
10 years. At an average of ~273 seconds in 2018, McDonald’s had the longest drive-thru
time relative to select peers. This represents an increase of ~65 seconds since 2016, the
highest increase among peers.
We believe the notable increase in drive-thru times could largely be a result of increased
menu complexity, and a potential contributor to breakfast share losses. McDonald’s
appears to have a heightened focus on improving drive-thru service times in 2019,
including competitions across different regions and site visits to best-in-class operators to
gather best practices.
4.0%
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25 June 2019
McDonald’s Corporation (MCD) 15
Figure 24: McDonald’s service times have
meaningfully increased over time, including by ~65
seconds over the last two years alone.
Figure 25: McDonald’s drive-thru service times are
the highest among peers, also reflecting the highest
McDonald’s recently announced intention to phase out its customizable line of premium
burgers, the Signature Crafted platform, nearly two years after launching (May 2017).
McDonald’s instead is using the Quarter Pounder line-up with a fresh beef patty as its
more premium product. With an increased focus on operations and speed of service, the
premium platform seemingly did not generate high enough volume to outweigh the cost of
increasing complexity. We note the roll-out of a plant-based protein burger could
supplement the premium side of the spectrum with sufficient volume to offset headwinds
from increased complexity.
Signature Crafted was not McDonald’s first attempt at a “better burger” or more
customizable line-up. Signature Crafted was a scaled down version of McDonald’s “Create
Your Taste” platform, which was tested in 2014 and even more customizable than its
successor. In 2013, McDonald’s discontinued the Angus beef burger, a premium product
first introduced in 2009 nationally.
The growth of fast casual burger chains highlights consumer demand for premium burger
products, but it is unclear whether mature QSR chains can reposition themselves to deliver on
both the value and premium sides of the menu. Premium platforms offer an opportunity for
trade up from the traditional menu, but with the increasing penetration of fast casual burger
peers, unlimited information and comparable prices, we believe consumers might instead trade
up to fast casual concepts, rather than premium lines at QSRs. Additionally, lack of marketing
support behind premium platforms after initial launch and discounting of core menu items
makes it difficult to maintain high levels of sales mix in the premium channel.
Burger segment is largely a zero-sum game
With ~97% of sales concentrated among 35 of the largest burger chains (and ~78%
among the five largest burger chains) and average growth of just ~3% over the last five
years (vs ~4.5% in limited service restaurant segment), the burger segment is largely a
market share game. In the US, burgers represented ~$85BN of sales in 2018, with
McDonald’s capturing ~45% of the segment, Burger King ~12%, Wendy’s ~11%, Sonic
~5% and Jack in the Box ~4%.
A 3% increase in the burger segment in 2019 would translate to ~$2.5BN in segment
sales. For context, ~$2.5BN in sales growth at McDonald’s would effectively be ~6.5% in
SSS, not unreasonable following a 4.5% comp in 1Q19 and potential for greater
contribution from digital, delivery and EOTF remodels throughout 2019.
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McDonald’s is discontinuing its
premium Signature Crafted platform
Burgers are the most fragmented category in
restaurants, with 97% of sales generated
among 35 concepts (~80% of sales with 5
largest burger chains)
25 June 2019
McDonald’s Corporation (MCD) 16
Current consensus expectations are for McDonald’s, Burger King, Wendy’s and Jack in
the Box to collectively grow by 3.5% in 2019 (vs ~2.3% in 2018). We estimate every 1%
additional increase at McDonald’s would be a ~1.5-2% collective sales drag for Burger
King, Wendy’s and Jack in the Box, highlighting the power of McDonald’s to shift the
dynamics of the segment. The consensus is for McDonald’s US SSS of 4.2% in 2019.
Average mature burger peer SSS expectations are ~1.4%, together implying pretty high
growth across the segment.
Figure 26: In periods of outperformance or
underperformance for McDonald’s, mature burger
peer SSS tend to move opposite, highlighting the
share shift in the segment.
Figure 27: The only time McDonald’s hit ~4%+ in
SSS over the last decade, mature burger peers had
largely muted/negative growth. Expectations for
MCD US SSS of 4%+ could hit peers harder than
current expectations.
Source: Company data, Consensus Metrix, Credit Suisse estimates
Note: (1) Mature burger peers include weighted average fiscal year SSS of Burger King US, Wendy’s North America, Jack in the Box and Sonic. (2) 2019E SSS reflects Consensus Metrix estimates.
Source: Company data, Consensus Metrix, Credit Suisse estimates
Note: (1) Mature burger peers include weighted average fiscal year SSS of Burger King US, Wendy’s North America, Jack in the Box and Sonic. (2) 2019E SSS reflects Consensus Metrix estimates.
Concentrated burger segment
The burger segment represents the most concentrated in the industry, with ~97% of total sales
concentrated among large chains and ~80% of sales shared among the five largest burger
concepts. The segment is slightly more fragmented in terms of units, with large chains
comprising ~90% of the units and the top five making up ~70%. The significant penetration in
the burger space combined with negative industry traffic creates a challenging backdrop and
heightened competitive activity. We expect a largely share shift environment.
Figure 28: The burger segment is the most
concentrated, with the top five burger chains making
up ~80% of sales and large chains ~97% of sales.
Figure 29: The top five burger chains make up nearly
Top 5 Chains Other Large Chains Small Chains & Independents
68% 24% 9%
0% 20% 40% 60% 80% 100%
Burgers
Chicken
Bakery Café
Coffee
Sandwich
Frozen Desserts
Mexican
Pizza
Asian/Noodle
Unit Composition by Segment
Top 5 Chains Other Large Chains Small Chains & Independents
25 June 2019
McDonald’s Corporation (MCD) 17
While mature burger players are exhibiting minimal growth, select fast casual/better burger
concepts are demonstrating robust growth, representing ~7% of the unit count among the
largest burger chains in the segment (35 concepts), but a significant 65% of the unit
growth contribution in 2018 and 50% in 2017.
Figure 30: The overall burger segment has demonstrated ~1% unit growth over the last several years.
Figure 31: A significant portion of growth is coming from fast casual burger concepts, which represent <10% of the segment’s units and ~65% of the unit growth in 2018 (among largest burger chains).
Note: Represents units & unit growth contribution among Top 500 Chains in 2018 (35 burger chains in top 500 list).
Despite strong growth and increasing popularity in the fast casual burger sub-segment, the
mature burger names remain the most significant competitive threat to McDonald’s given
their large-scale, unit overlap, customer overlap and value focus.
Burger King – 77% of McDonald’s store base competes with Burger King within
a three-mile radius. For comparison, 95% of Burger King restaurants compete
with McDonald’s within a three-mile radius.
Wendy’s – 72% of McDonald’s store base competes with Wendy’s within a three-
mile radius. For comparison, 97% of Wendy’s store base competes with a
McDonald’s within a three-mile radius.
Sonic – 39% of McDonald’s store base competes with Sonic restaurants within a
three-mile radius. For comparison, 89% of Sonic restaurants compete with
McDonald’s within a three-mile radius.
Jack in the Box – 24% of McDonald’s store base competes with Jack in the Box,
with less overlap due to JACK’s smaller system size. For comparison, 98% of
Jack in the Box restaurants compete with a McDonald’s within a three-mile radius.
Figure 32: McDonald’s faces the most competitive overlap with Burger King and Wendy’s, largely due to their large store bases.
Figure 33: McDonald’s exerts significant competitive pressure on mature burger peers based on store overlap, with ~90%+ of each concept’s store base facing competition from McDonald’s within a three-mile radius.
Net gain on sale of restaurant business $0.0 ($1,155.8) $0.0 $0.0 ($68.0) ($240.8) ($308.8) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Credit Suisse HOLT® Analysis MCD's current price implies expectations of 4.7 % sales growth. MCD’s valuation is more sensitive to top-line growth, with every 100bps adding ~$30 per share, and every 100bps of EBITDA margin adding ~$5 per share.
EBITDA margins: 2019-2029 based on CS Research, then assumed
constant
+200 bps 52.3% $162 $187 $215 $249 $289
> 10%
downside
Within
10%
> 10%
upside
MCD's valuat ion is more sensit ive to top line growth with every
100bps increment adding ~30 per share vs. ~$5 per share
added for 100bps incremental margins
Source: Credit Suisse HOLT®. CFROI and HOLT are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
Sales growth: 2019 based on CS Research; then solved for the sales
CAGR required to get to the current price
After the 10-year explicit forecast, the HOLT methodology calculates
the terminal value by fading returns on capital and growth towards cost
of capital and GDP growth respectively
For this analysis, we have made two adjustments consistently across
our coverage: first, we are using the US Country discount rate
(3.83%) for all companies and second, we have adjusted the final fade
rate from 10% to 5% to account for the sector's longer sustainability
Steve Easterbrook President & CEO $1,341,667 $11,500,113 $3,034,336 $15,876,116
Kevin Ozan EVP & CFO $791,667 $2,900,058 $958,527 $4,650,252
Douglas Goare Former President, International Lead Markets & CRO $728,333 $2,000,078 $1,630,342 $4,358,753
Chris Kempczinski President, McDonald’s USA $725,000 $3,500,188 $453,152 $4,678,340
Joe Erlinger President, International Operated Markets $587,500 $1,500,064 $1,870,172 $3,957,736
Management Compensation Metrics
CEO Steve Easterbrook
Tenure as CEO 4-yrs
Total Compensation ~$15.8MM
Short-term Incentive Metrics
Operating Income Growth
Comparable Guest Count Growth
Delivery Sales Initiative
Digital Adoption
Long-term Incentive Metrics Vesting Period
Stock Options 4-yrs
RSUs 3-yrs
Compound Annual EPS Growth
3-yr ROIIC
3-yr Cumulative TSR Relative to S&P 500
Board of Directors
Director Joined Board
Enrique Hernandez, Jr. Chairman of the Board; Chairman & CEO of Inter-Con Security Systems 1996
Jeanne P. Jackson CEO of MSP Capital; Director of The Kraft-Heinz Company & Delta Air Lines 1999
Robert A. Eckert Operating Partner of Friedman, Fleischer & Lowe 2003
John W. Rogers, Jr. Founder, Chairman & Chief Executive Officer of Ariel Investments 2003
Margaret H. Georgiadis CEO of Ancestry; former CEO of Mattel 2005
Richard H. Lenny Non-executive Chairman of Conagra Brands & Information Resources 2005
Sheila A. Penrose Non-executive Chairman of Jones Lang LaSalle 2006
Miles D. White Chairman & Chief Executive Officer of Abbott Laboratories 2009
Lloyd H. Dean CEO of CommonSpirit Health; former President & CEO of Dignity Health 2015
Steve Easterbrook President & CEO of McDonald's 2015
John J. Mulligan Executive Vice President & COO of Target 2015
Paul S. Walsh Chairman of Compass Group PLC; former CEO of Diageo plc 2019
Experience
25 June 2019
McDonald’s Corporation (MCD) 40
Companies Mentioned (Price as of 21-Jun-2019) Beyond Meat (BYND.OQ, $154.13) Colgate-Palmolive Company (CL.N, $72.95) Domino’s Pizza Inc. (DPZ.N, $280.33) Dunkin’ Brands Group, Inc. (DNKN.OQ, $79.54) General Mills (GIS.N, $53.77) Grubhub Inc. (GRUB.N, $71.17) Jack in the Box Inc. (JACK.OQ, $85.08) McDonald’s Corporation (MCD.N, $204.26, OUTPERFORM, TP $230.0) Mondelez (MDLZ.OQ, $55.25) Monster Beverage Corporation (MNST.OQ, $63.78) Nike Inc. (NKE.N, $85.75) Papa John’s International, Inc. (PZZA.OQ, $44.37) PepsiCo (PEP.OQ, $133.96) Plexure Group (PLX.NZ, NZ$0.8) Procter & Gamble (PG.N, $111.2) Restaurant Brands International Inc (QSR.N, $69.99) Starbucks Corporation (SBUX.OQ, $83.82) The Coca-Cola Company (KO.N, $51.55) The Wendy’s Company (WEN.OQ, $19.37) Yum! Brands, Inc. (YUM.N, $110.27)
Disclosure Appendix
Analyst Certification I, Lauren Silberman, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for McDonald’s Corporation (MCD.N)
MCD.N Closing Price Target Price
Date (US$) (US$) Rating
27-Jun-16 116.30 130.00 O
27-Jul-16 119.48 132.00
27-Oct-16 112.08 128.00
24-Jan-17 121.05 130.00
02-Mar-17 128.23 137.00
26-Apr-17 140.84 157.00
08-Jun-17 151.43 165.00
26-Jul-17 156.51 170.00
25-Oct-17 163.58 178.00
19-Dec-17 173.39 185.00
23-Jan-18 176.81 191.00
06-Mar-18 151.20 175.00
14-Mar-18 158.24 NC
* Asterisk signifies initiation or assumption of coverage.
Effective July 3, 2016, NC denotes termination of coverage.
O U T PERFO RM
N O T CO V ERED
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the ana lyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms repres enting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms represen ting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or r egional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stoc ks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform wh ere an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.
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McDonald’s Corporation (MCD) 41
Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 46% (32% banking clients) Neutral/Hold* 39% (28% banking clients) Underperform/Sell* 13% (22% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for McDonald’s Corporation (MCD.N)
Method: Our $230 target price and Outperform rating is based on ~18x our NTM EBITDA in 12 months, implying a P/E of ~26x our NTM EPS in 12 months. Our ~18x EBITDA multiple is in-line with MCD’s current trading multiple and at a premium to its three-year average EV/EBITDA
of ~14.5x (to June 2019).
Risk: Key risks to our $230 price target price and Outperform rating for MCD include: competition, US macro environment and FX volatility. MCD operates in a highly competitive restaurant environment. Increased product and price competition could adversely affect revenue and profits. Decreases in consumer discretionary spending or decline in consumer food-away-from-home spending could negatively impact financial results. MCD is exposed to foreign currency volatility in all of its international markets, which could adversely affect MCD’s business, results of operations, financial conditions and cash flow.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): MCD.N Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: MCD.N Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): MCD.N
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