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Non-Tech : McDonalds (MCD) -- Ignore unavailable to you. Want to Upgrade?

To: Fredric D. Bellamy who wrote (24)	10/23/1997 8:18:00 PM
From: Andrew	Read Replies (1) \| Respond to of 288

Hi guys... Here's a shamelessly bullish post I just submitted to the "McDonald's - Why Warren Buffett is Buying" thread. Maybe some of you folks could comment: (the italicized part is from Doug's earlier post that I was replying to) ********************************* "I'm looking over the horizon to the point a few years away, when the dollar is less strong to foreign currencies, and these capital investments are threaded back, and the earnings get a boost from the exchange rate, at the same time capital investment becomes a lower part of the expense load. With MCD's strong brand name, excellent cash-flow-based business model, and ability to franchise its name to keep future capital investment low, its an understandable business model for a young person to watch grow over the next 10, 20 years." Doug, I do valuations based on present value of estimated future free cash flows. I'm intensely interested in buying into MCD, but as you well know, their current expansion-related capital expenditures are killing the free cash flow, making valuation difficult. I think I agree with you that eventually this massive expansion will slow, the cash will free up and pour into investors pockets through stock buybacks and/or dividends. What I'm trying to decide is how much the inflows vs. outflows will unbalance - in order to decide if this is a screaming buy, or merely a good value. Besides the capital expenditures, I have a theory that earnings are also being held back by this expansion. There have got to be major uncapitalized expenses associated with the constant opening of new stores. When the expansion slows, perhaps the margins will expand also? Also, the rising dollar is likely hurting year-ago comparisons somewhat? Another thing I'm wondering is what percentage of these international stores being opened are franchised vs. company owned. I've read an opinion that many are company owned - the idea being MCD gets the stores on their feet, then brings in a local owner. It seems likely to me that collecting franchisee fees is a much higher margin business than running the restaurants themselves. In summary, in the long term, I see the following effects: Earnings increasing from: 1. Decreased expansion related expenses 2. Dollar not rising forever 3. Higher margins as proportion of company-owned restaurants decreases 4. Capital gains as MCD sells off the company owned stores (like KO does with bottlers - spectacular results) Free cash flow exploding because of: 1. Much higher net earnings (see above) 2. Much lower capital expenditures as rate of expansion slows Could you comment on how likely this whole scenario sounds? The difficult part is estimating how much free cash flow (FCF) will result. It's not like a small growth company where the FCF tends to grow in proportion with the company. It's a massive business with enormous cash flows, that at some point are going to free up spectacularly. How do you value that? (rhetoric question). I'm inclined to think that today's price is very cheap. I'm wavering into buying... Regards, Andrew