December 01, 2009

McDonald s Corporation
Current Recommendation

(MCD-NYSE)

NEUTRAL
OUTPERFORM 11/30/2009 $63.25 $65.00

SUMMARY
McDonald s global same-store sales continue to grow maintaining healthy margins and outperforming competitors. Earnings surpassed the Zacks Consensus Estimate, and were up 10% year over year. With a strong balance sheet and consistent earnings, we think the stock provides relative safety and moderate growth prospects being exposed to faster-growing international markets. However, the economic headwind, which has affected consumers disposable income, is impeding growth. Moreover, the intense competition among fast-casual restaurants to woo consumers may adversely affect its operating margins and profits. As such, we recommend a Neutral rating on the stock. Risk Level * Type of Stock Industry Zacks Industry Rank * Low, Large-Growth Retail-Restaurants 167 out of 217

Prior Recommendation Date of Last Change Current Price (11/30/09) Target Price

SUMMARY DATA
52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh) Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2009 Estimate P/E using 2010 Estimate Zacks Rank *: Short Term 1 3 months outlook
* Definition / Disclosure on last page

$64.53 $50.86 11.14 0.65 7,879,387 1,091 $69,028 1.49 68 1 $2.20 3.48

ZACKS ESTIMATES
Revenue
(In millions of $)

Q1 (Mar) 2007 2008 2009 2010 5,293 A 5,615 A 5,077 A 5,577 E

Q2 (Jun) 5,839 A 6,075 A 5,647 A 6,028 E

Q3 (Sep) 5,901 A 6,267 A 6,047 A 6,323 E

Q4 (Dec) 5,754 A 5,565 A 5,873 E

Year (Dec) 22,787 A 23,522 A 22,644 E 22,931 E

4.1 18.3 38.5 16.6 16.0 14.7

Earnings Per Share

(EPS is operating earnings before non-recurring items)

2007 2008 2009 2010

Q1 (Mar) $0.63 A $0.81 A $0.83 A $0.95 E

Q2 (Jun) $0.71 A $0.94 A $0.97 A $1.12 E

Q3 (Sep) $0.83 A $1.05 A $1.15 A $1.25 E

Q4 (Dec) $0.73 A $0.87 A $1.00 E

Year (Dec) $2.90 A $3.67 A $3.95 E $4.30 E 9

Zacks Projected EPS Growth Rate - Next 5 Years %

2009 Zacks Investment Research, All Rights reserved.

www.zacks.com

OVERVIEW
Founded in 1948, the Oak Brook, Illinois-based McDonald s Corporation (MCD) is a leading fast food chain operating 32,278 restaurants in over 118 countries as on September 30, 2009. The company mainly operates and franchises quick-service restaurants (QSRs) under the McDonald s brand. Of the total number of restaurants, 25,975 are operated by franchisees (including 3,095 operated by developmental licensees, 4,081 operated by affiliates primarily in Japan, and 18,799 operated by conventional franchisees), and the company operates 6,303 restaurants. In 2008, McDonald s derived 70% of sales from its company-owned restaurants, and 30% through fees from franchised and affiliated restaurants. The company s major markets are Australia, Europe, Brazil, Canada, China, France, Germany, Japan (a 50%-owned affiliate), the U.K., and the U.S. The Europe, U.S., and APMEA1 segments, respectively, account for approximately 42%, 34% and 18% of 2008 total revenue. France, Germany and the United Kingdom collectively account for roughly 55% of Europe s revenue. Australia, China and Japan collectively account for nearly 50% of APMEA s revenue. In early April 2008, the company sold its minority ownership interest in the United Kingdom-based Pret-AManger for $229.4 million. In August 2007, the company sold its Boston Market chain to Sun Capital Partners. During 2006, the company divested its entire ownership in Chipotle Mexican Grill.

Restaurant Geographic Locations As on September 30, 2009 10% 26% 43%

21% U. S. Europe APMEA Other Countries

REASONS TO BUY
McDonald s continues to grow same-store sales while maintaining healthy margins and outperforming competitors. Global same-store sales rose 3.8% with the U.S. sales going up 2.5%, Europe up 5.8% and Asia/Pacific, Middle East and Africa up 2.2% in the third quarter of 2009. Even in the recession, McDonald's has remained largely unruffled by the slowdown and is planning to accelerate its expansion in India. The company plans to open 40 outlets in India during 2009 10, bringing the total to almost 200 restaurants. By 2015, the company targets to open 180-190 more restaurants. The company currently operates 173 restaurants in India. Management expects to refranchise 1,000 to 1,500 company-owned restaurants between 2008 and 2010. From January 2008 to September 2009, the company had refranchised 970 restaurants. Currently, 80% of total restaurants are franchised. Re-franchising a large chunk of its system will provide another engine for EPS growth and ROE expansion, in our opinion, as the company reduces its capital requirements.
1

Asia/Pacific, Middle East and Africa

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McDonald s has paid dividends for 33 consecutive years and has increased the dividend amount every year. The company recently raised its quarterly dividend by 10%. In September 2007, the company announced its intention to return $15 billion to $17 billion to shareholders via dividend and share repurchases from 2007 through 2009. This is nearly double that of $8 billion the company returned between 2004 and 2006. From January 1, 2007 through September 30, 2009, the company had returned $15.6 billion to shareholders.

REASONS TO SELL
The restaurant industry remains under pressure in the current economic downturn, which has badly affected consumers disposable income. The operators of fast-casual restaurants are reporting declining traffic with consumers dining out less or preferring to eat at home. The competition among fast-casual restaurants is expected to remain fierce with respect to price, service, location, and concept in order to drive traffic, which may adversely affect the company s restaurant operating margins and profits. Due to high exposure to international markets, McDonald s remains prone to currency fluctuations. This may adversely affect the top and bottom lines. Management hinted that currency fluctuations might lower its full-year earnings by $0.16.

RECENT NEWS
McDonald s Exceeds Zacks Estimates September 30, 2009

McDonald s Corporation recently reported third-quarter 2009 results that topped the Zacks Consensus Estimate, driven by effective cost control and rise in comparable sales across all regions. McDonald s quarterly earnings came in at $1.15 per share, up 10% from $1.05 reported in the prior-year quarter, and surpassed the Zacks Consensus Estimate of $1.11. The strong U.S. dollar moderates the third-quarter results, trimming the earnings by $0.05 per share. Excluding foreign currency translation and gains, earnings increased 14% to $1.20 per share. Revenue for the quarter declined 4% to $6,046.7 million, but increased 2% in constant currencies. Revenue from company-operated restaurants declined 7% to $4,093.6 million, whereas revenue from franchise-operated restaurants increased by 5% to $1,953.1 million. Total operating income rose 6% to $1,932.8 million, but jumped 11% in constant currencies. Despite a sinking global economy, McDonald s continues to grow same-store sales while maintaining healthy margins by expanding market share. Global same-store sales rose 3.8% with the U.S. sales up 2.5%, Europe up 5.8% and Asia/Pacific, Middle East and Africa (APMEA) up 2.2%. New menu products, including Angus Third Pounders and McCafe premium coffee line-up, boosted U.S. comps. Total company-operated restaurant margins for the quarter expanded 70 basis points to 19.4%. Restaurant margins increased 110 basis points to 19.3% in the U.S., 40 basis points to 20.4% in Europe, and 100 basis points to 18% in APMEA, but dropped 20 basis points to 16.9% in Other Countries (Canada and Latin America). Recently, the company announced a 10% increase in its quarterly dividend, bringing the total quarterly dividend to $0.55 per share. McDonald s has returned $1.3 billion to shareholders through dividends and share repurchases during the quarter.

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McDonald s Exits Iceland: Effective November 1, 2009, McDonald s Corporation ceased operating three of its franchised restaurants in Iceland due to a rise in the cost of ingredients used in the meals. The company had to stop importing resources from Germany due to the strengthening of the euro and weakening of Iceland s krona, besides high taxes on imported foods, which almost doubled the cost of operations. Moreover, passing on increased costs to customers would have resulted in a 20% rise in menu price. The restaurants were run by franchisee Jon Ogmundsson since 2004.

VALUATION
McDonald s Corporation s current trailing 12-month earnings multiple is 16.6X, compared to the 19.9X industry average and 27.4X for the S&P 500. Over the last five years, McDonald s shares have traded in a range of 13.9X to 21.6X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward 2009 earnings estimates. We have a Neutral recommendation on the stock. Our target price of $65.00, 16.5X 2009 EPS, reflects this view.

Key Indicators
P/E 5-Yr High (TTM) 21.6 78.6 26.6 24.3 60.5 P/E 5-Yr Low (TTM) 13.9 11.8 13.8 13.8 12.4

McDonald s Corporation (MCD) Industry Average S&P 500 Yum! Brands, Inc. (YUM) Starbucks Corporation (SBUX)

P/E F1 16.0 17.6 18.9 16.3 21.7

P/E F2 14.7 14.5 15.4 14.9 18.9

Est. 5-Yr EPS Gr% 9.1 15.0 10.7 11.6 16.3

P/CF (TTM) 13.1 8.9 11.5 11.0 13.7

P/E (TTM) 16.6 19.9 27.4 16.5 27.1

TTM is trailing 12 months; F1 is 2009 and F2 is 2010, CF is operating cash flow

P/B Last Qtr. McDonald s Corporation (MCD) Industry Average S&P 500 5.1 2.6 3.5

P/B 5-Yr High 5.3 2.6 10.0

P/B 5-Yr Low 2.4 2.6 2.9

ROE (TTM) 32.6 1.2 22.4

D/E Last Qtr. 0.8 -1.7

Div Yield Last Qtr. 3.4 0.4 2.1

EV/EBITDA (TTM) 9.9 12.9

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Earnings Surprise and Estimate Revision History

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If you do not agree with our NEUTRAL recommendation for MCD Read why professional investors may have a different recommendation on the stock Go to: http://www.stockresearchwiki.com/tiki-index.php?page=MCD/Ticker

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of MCD. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 861 companies covered: Outperform- 18.1%, Neutral- 75.5%, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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