Our cross-sectional analysis of McDonald’s and its peers’ consensus forward EV/EBITDA multiples versus forward EBITDA growth rates shows that the company is fairly valued. The trend line clearly shows that companies in this industry tend to be valued on EBITDA growth. While Chipotle commands a 22x multiple, it also expects 20%+ EBITDA growth in coming years. On the other hand, McDonald’s 10x multiple is justified by its high–single digit expected EBITDA growth rate.
Based on the fact that McDonald’s falls a bit below the trend line—and the fact that 2014 could be a better year for the company, given new initiatives—we expect that the company will trade in the high 90s or possibly above 100 over the next 12 months. Downside risk is partially mitigated by a high 3.5% dividend yield. The company is fundamentally sound, given its high percentage of stable royalty revenues and low operating leverage. The company also has the highest free cash flow yield in its peer group, at 4.5%. Although it most likely will not see the same growth in shareholder returns as it saw in 2011, next year could be a decent one for the company and its investors.