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Must-Know: McDonald’s Valuation and Risk Factors

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Jul. 23 2015, Updated 1:06 p.m. ET

McDonald’s valuation

McDonald’s (MCD) is currently trading at a forward (next 12 months) price-to-earnings (or PE) ratio of 20x. When we look at a valuation multiple like the PE ratio, it’s also important to compare this metric with a company’s peers. This comparison will help you identify whether a company is undervalued or overvalued relative to its peers.

The average PE of the above companies is 27x, with Yum! Brands (YUM) trading at 23x, Wendy’s (WEN) trading at 32x, and Sonic (SONC) trading at 23x. On a two-year compounded annual basis, McDonald’s EPS growth is estimated to be at 10.2%, whereas the average growth expectations on a two-year annual compounded basis of the same above peers is 14%.

Given that McDonald’s is a mature company with little room to grow compared to that of the above peers, the company seems to be fairly valued. The Consumer Discretionary Select Sector SPDR (XLY) has a 4% exposure to McDonald’s.

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Risks

McDonald’s management realizes that big changes are needed, and thus released its turnaround plan. Most of the turnaround plan focuses on structural changes to the company. As stated earlier, McDonald’s has been experiencing a decelerating same-store sales growth as a result of declining traffic. McDonald’s has introduced healthy menu items such as salads and wraps, along with more premium items such as the Sirloin Burger and Artisan Chicken, but these new items have yet to show a positive effect.

Next, we’ll see what the analysts are expecting in McDonald’s 2Q15 results.

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