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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: stan_hughes who wrote (192732)	9/19/2002 11:03:28 AM
From: reaper	Read Replies (1) of 436258

i don't have a ton to chime in with... MCD is not a growth business any more, and hasn't been for a while. Cash generation in 1999 was $3.0 billion, in 2000 it was $2.8 billion, and in 2001 it was $2.7 billion. they are on track for +/- $2.9 billion this year. so basically they generate the same amount of cash year in and year out -- no growth. but... you also have to consider the capex and acquistions of franchisees and other busiesses (like Boston Chicken). in 1999 they spent $2.3 billion, in 2000 they spent $2.2 billion, in 2001 they spent $2.1 billion. so this is the truly frightening thing about MCD -- they spend over $2 billion a year on capex and acquistions, and despite spending that money their cash flow does not grow. in other words, JUST TO RUN IN PLACE they seem to need to spend $2 billion + a year. so what are you left with? a business that generates +/- $1 billion a year in free cash and that free cash is not growing. what is that worth? well, if it was a gov't bond it would be worth 20-25x (i.e. the inverse of the 10 or 30-year bond); since it is a corporation with risks to the cash flows its worth 15-20x. current cap on MCD is $23 billion, so we're getting close, but frankly given the BSE and trial lawyer issues i'd be thinking multiples of more like 10-15x. i NEVER understood why people used to pay 30x free cash for this thing. i think somebody asked if this was company-specific or if all burger chains were facing this issue. the 'fast food' segment is full -- this is a problem for ALL of them. they are all basically spending a lot of money on new restaurants and refurbishments just to keep their cash flows from falling. i think you have already seen Jack in the Box (JBX) and CKE Enterprise (CKR -- they own Carls and Hardys) take a huge hit recently. Cheers

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