Analyst: Dutko, SergeWilliam Paterson University

12/16/20142014

McDonald’s and Wendy’sFinance Information Systems

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Table Of Contents

Page:

2. Fast Food Industry Overview

3. McDonald’s Analysis

7. Wendy’s Analysis

11. Appendix

16. Sources

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Fast Food Industry

Target Market

The fast food industry is one of the biggest industries in the world. A fast food location can be found literally on every street corner in the U.S and in many countries around the world. The industry caters to a variety of customers and is capable of changing menus relatively quickly to match new customer tastes and trends. Future market trends have very positive outlooks because fast food companies are actively researching and analyzing trends to predict future trends.2 The fast food industry is also largely recession proof because of their low food prices and ease of access for customers.

Products and Services

The products in the fast food industry can vary from company to company. For example certain chains specialize in Hamburgers while other chains specialize in pizza. Most locations offer soda fountains and now many fast food locations even offer coffee and tea. Production of foods can vary largely from the type of restaurant. According to Wilson, a fast food kitchen would typically include: “a very large grill, a dressing station for condiments, a fryer for French fries, a soda fountain and a counter for orders.” 1 The production of food is optimized for fast service. Future opportunities include faster payment methods, via new mobile pay systems currently being used in many restaurants.

Market Analysis

Market trends for the entire industry do not show any signs of slowing down, According to Franchise help, the growth for industry revenue have grown a consistent 8.6% annually every year.2 The Demand for healthier food has been reflected with many companies improving the quality of their food and listing nutritional facts. The fast food market needs further improvement on the quality of food, some restaurants offer all organic foods already and many others have improved the quality of their food while some advertise fresh, never frozen products. Many locations try to differentiate from other restaurants.

Competition

Competition for market space is fierce in the fast food industry. Every company differentiates and as a result a very diverse selection is created for the consumer. In the US alone there are over 200,000 locations.2 Some competitive strategies include using all organic materials (Chipotle, Moe’s), some only use fresh ingredients (Wendy’s), and some utilize fast service time (McDonald’s).

McDonald's and Wendy's1 Wilson2 Franchise Help

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The two companies analyzed in this report, McDonalds (MCD) and Wendy's (WEN) are excellent examples of fast food growth and success.

McDonald's (Ticker: MCD)

McDonald's is the biggest fast food chain on the planet operating over 34,000 locations in over 100 countries serving over 70 million people daily.3 McDonalds low food prices paired with good value meals have been the driving factor in their growth and stability. McDonalds offers food for all occasions. For breakfast McDonald's offers a full breakfast menu that includes coffee, pancakes, eggs and sausage. For lunch and dinner, McDonalds rolls out the famous Big Macs. According to investor relations, “McDonald’s has raised its dividend every year since 1976.”3

McDonald's financial performance is capable to impress. In 2013 its revenue was $28 Billion.4 Its market cap is 88.19B.4

Ratio Analysis Liquidity:

Current Ratio:

The current ratio in 2012 was 1.45 and it rose to 1.59 in 2013. A 10% rise.4 This rise can be attributed to the rise in revenue. Its ability to pay off short term debt and short term liabilities is very good.

Quick Ratio:

The quick ratio in 2012 was 1.09, in 2013 it was 1.3. A change of 19%.4 This means that they have $1.3 in assets to cover $1 worth of liability. Because it rose from 2012 indicates a very positive outlook. The rise can be attributed to system optimizations and to increases in net income.

Cash Ratio:

In 2012 the cash ratio was .69. In 2013 the ratio rose to .88. 4 A cash ratio is used to determine liquidity and how the company can pay off short term obligations using cash.

Asset Management:

Inventory turnover:

3 Investor relations, McDonald’s4 Bloomberg Terminal

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Inventory turnover in 2012 was 100.97 and it fell to 100.89, a decrease of .08%.4 Inventory turnover measures how much a company uses up its inventory and replaces it. In this case, a high turnover is necessary.

Days Sales Outstanding

The Days Sales Outstanding in 2012 was 17.99 and it dropped by 2.72% to 17.5 in 2012.5 This drop can be attributed to a variety of factors but the lower the better; DSO calculates the amount of days it takes to receive payment for services.

Fixed Asset Turnover:

The Fixed Asset Turnover in 2012 was 1.16 and it actually went down by 4.3% to 1.11.5 The fixed asset turnover is how fixed assets (buildings, grills, etc.) are used to produce revenue.

Total Asset Turnover:

Total Asset Turnover in 2012 was .81 and it dropped by 3.7% in 2013 to .78.5 Total Asset Turnover calculates how well the company utilizes all of its assets to produce revenue. A drop may indicate that they are underutilizing assets.

Debt:

Long Term Debt/common equity:

Long term debt to common equity ratio in 2012 was 89.14% and it rose by 16% to 88.26% in 2013.5 This ratio is long term debt over common equity to show how equity is used it finance.

Total Debt/ Total Assets:

Total Debt to Total Assets in 2012 was 38.52% and it rose by .16% to 38.58% in 2013.5 This is a ratio on how well a company can cover all of their debt with the total assets.

Profitability:

Operating Margin:

The Operating Margin in 2012 was 31.24% and it went down by .19% to 31.18% in 2013.5 The Operating Margin is the proportion of revenue that is left after operating expenses

Profit Margin:

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The Profit Margin for 2012 was 19.82% and it rose by .25% to 19.87% in 2013.5

Returns:

ROA:

Return on Asset ratio for 2012 was 15.98% and it went down by 2.94% to 12.51% in 2013.5

Return on common equity:

Return on common equity for 2012 was 15.98% and it dropped by 2.94% to 15.51% in 2013.5

Company Performance

In 2012 the stock price was $83.34.6 The stock went through some short run volatility runs and by 2013 the stock price was $94.12.6 The stock dropped to as low as $78.67 and went as high as $101.82. 6 The average stock price was $92.77. The calculated beta was .55 which basically makes McDonald’s a very safe investment. The company pays quarterly dividends of .77.7 The market performance is satisfactory but it could be better. The chart shows stock price movement.

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Beta

The Beta that I calculated was .55. This is very low and it means that for every 1% of market movement the stock will only move .5%

WACC

5 Bloomberg6 Yahoo Finance7 Bloomberg Terminal

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The WACC that I calculated (see appendix) gave me a weighted average cost of capital of 9.35%. In the equation I used the after tax cost of debt which was 1.80%; the Re, which was 10.53%; the Percentage of equity was 86.51%; and the Percentage of debt was 13.49%.

Capital Structure

McDonald’s capital structure uses mostly equity and debt financing. The percentage of equity was 86.51% and the percentage of debt was 13.49%.7

Equity Valuation

Using FCF calculations, the projected stock price for MCD was: $133.44.

Future Forecast:

The future performance will definitely increase because McDonald’s has steadily increasing revenues. They are also optimizing their food production system to have faster service and even lower costs.7

Conclusion

In conclusion, McDonald’s is a safe investment for many portfolio types. It has paid a steady dividend consistently and overall its stock price has been rising even though short-run volatility may force the stock price to jump around.

Recommendation: 5, Strong buy. Very stable in the long run, high dividends. McDonalds offers low cost, high value meals that are capable of selling in a recession and can sell in a thriving economy.

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Wendy’s (Ticker: WEN)

Wendy’s is the third largest fast food chain. Wendy’s operates over 6,500 locations is the US and 29 other countries.8 In 2013 revenue was $2.5 billion and a market cap of $3.18 billion.9 Wendy’s offers great food at low costs and has a massive system optimization initiative.10 Wendy’s focuses primarily on lunch and dinner menus. It constantly introduces new items to its menus, with a strong focus on fresh never frozen food.

Ratio Analysis

Liquidity:

Current Ratio:

The current ratio in 2012 was 2.47 and it rose to 2.64 in 2013, a 6.88% rise.9 This rise can be attributed to the rise in revenue. Its ability to pay off short term debt and short term liabilities is very good.

Quick Ratio:

8 Wendy’s Investor Relations9 Bloomberg Terminal10 Wendy’s 10-k

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The quick ratio in 2012 was 1.79, in 2013 it was 1.84. A change of 2.79%.9 This means that they have $1.84 in assets to cover $1 worth of liability. Because it rose from 2012 indicates a very positive outlook. The rise can be attributed to system optimizations and to massive increases in net income.

Cash Ratio:

In 2012 the cash ratio was 1.58. In 2013 the ratio rose to 1.66. 9 A cash ratio is used to determine liquidity and how the company can pay off short term obligations using cash.

Asset Management:

Inventory turnover:

Inventory turnover in 2012 was 140.88 and it was raised to 153.11 in 2013 9, an increase of 8.68%. Inventory turnover measures how much a company uses up its inventory and replaces it. In this case, a high turnover is necessary.

Days Sales Outstanding

The Days Sales Outstanding in 2012 was 9.41 and it dropped by 4.36% to 9 in 2012.11 This drop can be attributed to a variety of factors but the lower the better; DSO calculates the amount of days it takes to receive payment for services.

Fixed Asset Turnover:

The Fixed Asset Turnover in 2012 was 2.05 and it changed by .49% to 2.06.11 The fixed asset turnover is how fixed assets (buildings, grills, etc.) are used to produce revenue.

Total Asset Turnover:

Total Asset Turnover in 2012 was .58 and it dropped by 1.72% in 2013 to .57.11 Total Asset Turnover calculates how well the company utilizes all of its assets to produce revenue. A drop may indicate that they are underutilizing assets; however this is a very insignificant amount.

11 Bloomberg Terminal

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Debt:

Long Term Debt/common equity:

Long term debt to common equity ratio in 2012 was 72.75% and it rose by 1.54% to 73.87% in 2013. 11 This ratio is long term debt over common equity to show how equity is used it finance.

Total Debt/ Total Assets:

Total Debt to Total Assets in 2012 was 33.57% and it fell by 2.68%% to 32.67% in 2013. 11 This is a ratio on how well a company can cover all of their debt with the total assets.

Profitability:

Operating Margin:

The Operating Margin in 2012 was 4.9% and it went down by 10.82% to 5.43% in 2013. 11 The Operating Margin is the proportion of revenue that is left after operating expenses

Profit Margin:

The Profit Margin for 2012 was .28% and it rose to 1.83% in 2013. 11

Returns:

ROA:

Return on Asset ratio for 2012 was .16% and it went to 1.05% in 2013. 11

Return on common equity:

Return on common equity for 2012 was .36% and it was raised to 2.32% in 2013.12

Company Performance

In 2012 the stock price was $4.10.13 The stock went through some short run volatility runs and by 2013 the stock price was $8.1, a 98% increase.13 The stock dropped to as low as $3.93 and went as high as $10.02. 13 The average stock price was $6.93. The calculated beta was .85 which basically makes Wendy’s more or less a safe investment. The company pays dividends of .055 per quarter.12 The market performance is satisfactory, however the stock price has surged within this time period.

12 Bloomberg Terminal13 Yahoo Finance

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Beta

The Beta that was calculated was .85. This is decent, however due to Wendy’s relatively small size; it could have been much higher.

WACC

The WACC that I calculated (see appendix) gave me a weighted average cost of capital of 9.94%. In the equation the after tax cost of debt which was 2.20%; the Re, which was 13.5%; the Percentage of equity was 68.49%; and the Percentage of debt was 31.51%.12

Capital Structure

Wendy’s capital structure uses mostly equity and debt financing. They have a $1.4 Billion14 of long term debt, which will be very difficult to repay if the revenue does not substantially increase.

Equity Valuation

Using FCF calculations, the projected stock price for Wendy’s was: $11.61. The reasoning behind this is because Wendy’s is constantly growing and repurchasing shares. In the current year (2014, they have already purchased 300 million dollars’ worth of shares)15. The board is attempting to raise stock price through this method.

Future Forecast:

The future performance will definitely increase because Wendy’s is optimizing their food production system to have faster service and even lower costs.15

Conclusion 14 Bloomberg Terminal15 Bloomberg Terminal

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In conclusion, Wendy’s is not as safe as McDonalds, however it does carry potential. It has paid a steady dividend consistently and overall its stock price has been rising even though short-run volatility may force the stock price to jump around. Wendy’s may have a problem paying back its massive loan, so that may be something to consider.

Recommendation: 4, Wendy’s is a good buy however the investor must consider the long term debt of Wendy’s. Wendy’s has excellent stock and revenue growth and it will continue to rise in the near future.

Appendix

Regression:

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SUMMARY OUTPUT MCD

Regression Statistics

Multiple R0.50864680

5

R Square0.25872157

2

Adjusted R Square0.25729603

6Standard Error 0.00651846

Observations 522

ANOVAdf SS MS F Significance F

Regression 1 0.007711604 0.007711604181.490803

2 1.0718E-35Residual 520 0.02209497 4.24903E-05

Total 521 0.029806574

Coefficients Standard Error t Stat P-value Lower 95%Intercept 0.0000 0.0003 -0.0749 0.9403 -0.0006

X Variable 1 0.5533 0.0411 13.4719 0.0000 0.4726

Regression Statistics WEN

Multiple R0.36937205

2

R Square0.13643571

3Adjusted R Square

0.134775013

Standard Error0.01489928

6Observations 522

ANOVA

df SS MS FSignificance

F

Regression 1 0.0182375980.01823759

882.1555174

4 2.5572E-18

Residual 520 0.1154341340.00022198

9Total 521 0.133671732

Coefficients Standard t Stat P-value Lower 95%

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ErrorIntercept 0.0010 0.0007 1.5270 0.1274 -0.0003X Variable 1 0.8509 0.0939 9.0640 0.0000 0.6665

WACC Calculation

WEN

Cost of debt, rD 2.20%AFTER TAX COST OF DEBT

Beta 0.8509073381122670

Re=cost of equity = rf + beta*(E(rm)-RF) 13.5091%

rf 5% Given

E(rm) for s&P 15% Given

Oct. 2014 equity value, E 3,159,500,000 from Bloomberg Terminal

Oct. 2014 debt value, D 1,453,700,000 from Bloomberg Terminal

Total: Equity + Debt, E+D 4,613,200,000 from Bloomberg Terminal

Percentage of equity, E/(E+D) 68.49% from Bloomberg Terminal

Percentage of debt, D/(E+D) 31.51% from Bloomberg Terminal

Tax rate, TC 37.93% from Bloomberg Terminal

WACC 9.9453866%

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MCD

Cost of debt, rD 1.80% AFTER TAX

Beta 0.55331290206425

rf 5% Given

Re=cost of equity = rf + beta*(E(rm)-RF) 10.5331290%

E(rm) for s&p 15% Given

Oct. 2014 equity value, E 98,916,600,000from Bloomberg Terminal

Oct. 2014 debt value, D 15,427,400,000from Bloomberg Terminal

Total: Equity + Debt, E+D 114,344,000,000from Bloomberg Terminal

Percentage of equity, E/(E+D) 86.51%from Bloomberg Terminal

Percentage of debt, D/(E+D) 13.49%from Bloomberg Terminal

Tax rate, TC 32.65%from Bloomberg Terminal

WACC 9.3548470%

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Ratios

RatiosWEN 2012 WEN 2013 MCD 2012 MCD 2013

Liquidity Current Ratio 2.47 2.64 1.45 1.59Quick Ratio 1.79 1.84 1.09 1.3Cash Ratio 1.58 1.66 0.69 0.88

WEN 2012 WEN 2013 MCD 2012 MCD 2013Inv. Turn ovr 140.88 153.11 100.97 100.89DSO 9.41 9 17.99 17.5

Asset Management Fixed Asset Turnover 2.05 2.06 1.16 1.11Total Asset Turnover 0.58 0.57 0.81 0.78

DebtLong term debt/ common equity 72.75% 73.87% 89.14% 88.26%Total debt toLong term debt/ Total assets 33.57 32.67 38.52% 38.58%

WEN 2012 WEN 2013 MCD 2012 MCD 2013Profitability Operating Margin 4.9 5.43 31.24% 31.18%

Profit Margin 0.28% 1.83% 19.82% 19.87%

ROA 0.16 1.05 15.98% 15.51%Returns Return on common equity 0.36% 2.32% 36.82% 35.69%

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FCF

MCD

Current FCF 4,300,000,000

Anticipated growth rate, years 1-5 9.68%WACC 9.35485%

Long-term growth rate, after year 5 2.58%

Number of shares outstanding 990,400,000

YearAnticipated

FCF1 4,716,240,0002 5,172,772,0323 5,673,496,3654 6,222,690,8135 6,825,047,283

Terminal value calculationFCF in year 5 6,825,047,283Terminal value 1.0334E+11

Valuing MCD Corporation

Present value of FCFs, years 1-5 $21,692,544,701.84

Present value of terminal value $66,081,315,121.26

Value of MCD$132,162,630,242.5

3

Per share value $133.44

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WEN

FCF 2013 105,602,000

Anticipated growth rate, years 1-5 10.10000000%WACC 9.9453866%

Long-term growth rate, after year 5 7.12000000000000%

Number of shares outstanding 392,790,000

YearAnticipated

FCF

1 116,267,802

2 128,010,850

3 140,939,946

4 155,174,880

5 170,847,543

Terminal value calculation

FCF in year 5 170,847,543

Terminal value 6477410561

Valuing WEN Corporation

Present value of FCFs, years 1-5 $530,241,762.65

Present value of terminal value $4,031,961,457.19

Value of WEN $4,562,203,219.83

Per share value $11.6148660

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Sources:

Bloomberg Terminal

"Fast Food Industry Analysis 2015 - Cost & Trends." Fast Food Industry Analysis 2015 - Cost &

Trends.

Franchisehelp.com, n.d. Web. 11 Dec. 2014.

"Stock Information :: AboutMcDonalds.com." Stock Information :: AboutMcDonalds.com.

McDonald's, n.d. Web. 15 Dec. 2014.

Wilson, Tracy V.. "How Fast Food Works" 22 August 2006. HowStuffWorks.com.

<http://science.howstuffworks.com/innovation/edible-innovations/fast-food.htm> 13 December 2014.

Wendy’s 2013 10-k Annual report.