Thursday, December 29, 2011

McDonalds

Lets look at McDonalds (MCD) today.
This posting is open for discussion and to determine the entry and exit price points by using 3 different methods. These three methods use the historical P/E, CF/S and the dividend (D/S) ratios. Please note that there is a ton of ratios out there.
Definitions of the following terms used:
P/E. Price divided by its earnings, which shows what multiple that a investor is willing to pay for $1 dollar of earnings.
http://www.investopedia.com/terms/p/price-earningsratio.asp#axzz1ywxwNlkP
CF/S is the same as earnings except that its referring to the company’s ability to generate cash.
http://www.investopedia.com/terms/c/cashflowpershare.asp#axzz1ywxwNlkP
D/S or Dividend per share. For this ratio you would use the dividend yield formula.
http://www.investopedia.com/university/ratios/investment-valuation/ratio7.asp#axzz1ywxwNlkP
Using these historical ratios a person can estimate what the stock price range should be.
By comparing the 3 year average vs a longer term (10 year average or more) can also help to determine where the market believes the company is in its life cycle, which includes: start up (venture), growth or mature company.
McDonalds (MCD) trades on the NYSE and has been a publicly traded company for about a half century.
McDonalds for the past 21 years has had an average P/E trading range of 19.63 (high) and 12.46 (low).
McDonalds also has had some wild swings in the past, P/E value for example in 2002 McDonalds had a high P/E ratio of 43.89 and an really low P/E ratio in the following year 2003 at 10.54.
McDonalds has over that time have had an average annual EPS growth of 15.3% . By estimating future earnings one can estimate future share price. In this case McDonalds should earn about $5.90 in 2012 and using the average P/E the estimated trading range should be 103.38 (high) and 77.24 (low)
If your wondering about dividend growth? Yes McDonalds has had growth in that area as well.
For the past 21 years (16 years average) McDonalds has increased its dividends by 9.49%.
It should be noted that McDonalds have had growth spurts in dividend increases for example in 2003 McDonalds increased its dividend by 66.67%
For years MCD hadn’t broken the 1% yield mark in dividends until 2003. Since then MCD has been returning a good portion of its earning back to its share owners with todays P/D MCD has had a low for 2011 of 3.38% and a high of 2.43% it is estimated that MCD will increase its dividend in 2012 to 2.67 from 2.44 (2011). Doing the math on MCD’s dividend to price the dividend will support a price range of $98.19 (high) and $73.72 (low).
MCD’s CF/S average growth over the past 16 years is 12.08%, with the 3 year CF/S average being 10.96%. For 2012 MCD should be able to generate a cash flow per share of $7.45. Which is up from the 2011's amount of $6.77.
The share price works out to be $101.01 (high) and $75.46 (low)
Please note that I am looking for MCD to split its stock this coming year.
Now on to how to trade, As I’m looking to purchase MCD I’ll be writing a put at my price estimates in this case I’m looking to write the Put Option at $75. It would be best to sell the put for a short term however MCD is trading at its high. So I’m looking to sell the Jan 2013 put at 75 for 2.25 or more per share.