Macroeconomic Analysis of Government Fiscal Policy According

Macroeconomic Analysis of Government Fiscal Policy

According to the Bureau of Economic Analysis, Government fiscal policy had an effect on the overall economy. A report published by the Bureau, explains that in the first quarter of 2003:

Real federal government consumption expenditures and gross investment increased 2.6% in the first quarter, compared with an increase of 11.0% in the fourth. National defense decreased 1.5%, in contrast to an increase of 11.0%. Nondefense increased 10.5%, compared with an increase of 11.1%. Real state and local government consumption expenditures and gross investment decreased 0.1%, in contrast to an increase of 1.2%. ("Gross Domestic Product: first quarter 2003")

Other Factors

The consumer price index (inflation) was at 0.3 and the unemployment rate was 5.8 in March of 2003. The Import Price Index was.5 and the Producer Price Index was 1.5. In the latest report published by the Bureau of Labor and statistics, consumer expenditures averaged 39,518 per consumer unit. The components of consumer spending include; housing, food, transportation, entertainment, health care and pensions.

Business Cycle

Currently, we are in the recession stage of the business cycle. There was a slight increase in real GDP growth during the first quarter of 2003. The bureau and economic analysis explains that this growth was due to decreases in imports, equipment, software, private investment and a foreseen increase in the amount of federal government spending. ("Gross Domestic Product: first quarter 2003")

Restaurant Industry Analysis

According to an industry analysis conducted by the National Restaurant Association, sales in the industry topped $426.1 billion in 2002. There were over 870,000 restaurant locations and the industry employed 11.7 million people. Average daily sales for the industry are over $1.2 billion and overall sales are expected to increase by 4.5% by 2003 and are expected to make up 4% of the Gross Domestic Product. In the thirty-three years spanning 1970 until 2003 the annual growth rate of the industry has been 7.2%.

McDonalds Industry Analysis

The McDonald's Corporation is a part of the fast food segment of the restaurant industry and operates in 119 countries around the globe. Most of the corporation's locations are quick-service franchises that operate under the McDonald's brand name. ("McDonald's Corporation (NYSE) - Business Description") According to Multex Investor, 80% of the corporation's locations and 75% of total revenues are derived from nine markets including: Canada, China, Brazil, Japan, Australia, France, Germany, America and the United Kingdom. ("McDonald's Corporation (NYSE) - Business Description")

All of McDonald's restaurants are company operated, franchised, or operating under the structure of a joint venture. Restaurants that are franchised "supply capital by initially investing in the equipment, signs, seating and decor of their restaurant businesses and by reinvesting in the business over time." ("McDonald's Corporation (NYSE) - Business Description")

In turn, McDonald's shares the investment with the franchise by taking general ownership or leasing the building and land.

Franchisees are vital to the success of the McDonalds Corporation because they provide the company with a stream of revenue. The revenue stream is created through rent payment, initial fees and service fees. The company maintains a uniform structure of the franchise arrangement throughout the world. In most cases, the arrangement between the franchise and the company ends after 20 years. ("McDonald's Corporation (NYSE) - Business Description")

According to Multex Investor, McDonald's and its franchisees purchase food, equipment and packaging from independent suppliers. All of the independent suppliers must be approved by the McDonald's Corporation. All of the restaurant's personnel and staff are trained in food handling and preparation, food storage and customer service. McDonalds also has quality assurance labs all over the globe to make certain the company's restaurants and franchises have uniformity.

Multex explains,

The quality assurance process not only involves ongoing product reviews, but also onsite inspections of suppliers' facilities. Further, there is a quality assurance board, composed of the Company's technical, safety and supply chain specialists, which provides strategic global leadership for all aspects of food quality and safety." ("McDonald's Corporation (NYSE) - Business Description")

In addition to the McDonald's Brand the corporation also has several partner brands. These partner brands include Donatos Pizza, Boston Market and Chiptole Mexican Grill. The corporation also has a small interest in the United Kingdom-based Pr t A Manger. ("McDonald's Corporation (NYSE) - Business Description")

Most of the company's restaurants are opened for breakfast, lunch and dinner and have a limited menu. Most menus include egg mcmuffins, hotcakes, bagels, French fries, hamburgers, chicken sandwiches, salads, desserts and soft drinks. McDonald's Restaurants also have products that are only offered for a limited time. ("McDonald's Corporation (NYSE) - Business Description")

Financial Analysis

In the period ending December 2001 McDonalds' Total revenue was $3,899,200,000 and the company's gross profit was $1,123,700,000. Operating expenses related to Selling General and Administrative Expenses was equal to $1,320,100,000. Expenses related to R&D were not applicable and other operating expenses were equal to $7,000,000. Earnings Before Interest and Taxes were - $227,000,000. ("McDonald's Corporation Quarterly Income Statement") Total current assets equaled $1,715,400,000. Cash Flows from operating activities were $686,400,000, cash flows from investing activities were -$856,600,000 and cash flows from financing activities were $77,200,000. Change in Cash and Cash equivalents totaled -$93,000,000. ('McDonald's Corporation Quarterly Cash Flow Statement")

The average earnings estimate for this quarter is.28. The highest estimate was.30 and the lowest was.25. The average revenue estimate was $3.6 billion. The lowest estimate was $3.5 billion and the highest was $3.8 billion. ("First Call Earnings Estimates") The stock price as of April 28 was 16.93. The 52-week high was 30.72 and the low was 12.12. ("First Call Earnings Estimates")

Valuation Analysis

The VectorVest stock analysis of McDonalds as of 4/25/2003 is as follows:

The Value of the stock is 12.99 therefore the current price of the stock $15.81 is overvalued. The relative value of the stock,.82 is considered poor on the scale of 0.0 to 2.0. The Relative safety of the stock is.91 and is considered fair on a scale of 0.0 to 2.0. The relative timing rating is 1.23 which is good on a scale of 0.0 to 2.0. The comfort index is very good and is 1.32 on a scale of 0.0 to 2.0. The GRT or earnings growth rate is very poor at -2.00. The EPS is 1.35 and the P/E ratio is 11.71. The Earnings Yield is 8.52. (VectorVest)

McDonalds offers dividends at a rate of $.24 per share and the Dividend Yield is 1.5%. The dividend safety rating for McDonalds is 62 and is considered good on a scale from 0 to 99. The Dividend growth rate is 2% which is below the average of 3%. The YSG-vector is.71 which is poor on a scale of 0.0 to 2.0. (VectorVest)

Wendy's Industry Analysis

Wendy's International Inc., became a corporation in 1969 and has 6, 253 restaurants in the United States and 21 other nations. The corporation also belongs to the fast food segment of the restaurant industry. Wendy's has 1320 restaurants that are company owned and 4933 that are franchised. ("Wendy's International (NYSE) - Business Description")

Recently the corporation and its franchisees took over the operations of Tim Hortons Restaurants. There are 2,348 of these restaurants that are located in Canada and 160 of them that are located in America. Seventy-one of the restaurants are operated by the company and the remainder is operated by the franchisees. ("Wendy's International (NYSE) - Business Description") In addition to the Tim Hortons restaurants Wendy's International and its franchisees operated 210 Baja Fresh restaurants. Ninety-eight of the restaurants are owned by the corporation while the others are owned by the franchisees. Baja Fresh restaurants can be found in 19 states and Washington, D.C. ("Wendy's International (NYSE) - Business Description")

The Wendy's corporation does not sell food or supplies to its franchisees. Instead, the Company makes volume purchases of many of these products. The current purchasing measures allow independent distributors purchase certain products directly from suppliers. Similar to the McDonald's Corporation, Wendy's must approve the suppliers. The suppliers are then allowed to store and sell to the franchises and the company owned restaurants. ("Wendy's International (NYSE) - Business Description") The company believes that the structure of this supply chain aids in assuring quantity discounts, and product availability. Multex Investor explains, "These advantages are available both to the Company and to any franchisee that chooses to participate in the distribution program." ("Wendy's International (NYSE) - Business Description")

According to Multex the Hortons restaurants that are franchised throughout Canada must purchase some specific products such as sugar, flour and coffee from one of Horton's subsidiaries. ("Wendy's International (NYSE) - Business Description")

There are five distribution warehouses and the products are brought to restaurants via Hortons' own trailers and fleet of trucks. The suppliers that the Hortons restaurants use, whether company owned or franchised must also be approved by the parent company of Wendy's International. ("Wendy's International (NYSE) - Business Description")

An additional segment of the corporation is the New Bakery Co. Of Ohio Inc., which is a wholly owned subsidiary of Wendy's International. The bakery produces the bread buns for Wendy's restaurants but does not sell or produce any additional products to the company. Currently, the Bakery supplies 706 of the Company owned restaurants and 2,160 of the franchised restaurants. ("Wendy's International (NYSE) - Business Description")

Wendy's is open for lunch ad dinner and offers a limited menu. The menu features; chicken sandwiches, hamburgers, fries, chicken nuggets, soft drinks and shakes. Additionally, the menu offers unconventional foods such as chili, taco salads, and baked potatoes. Similar to the McDonald's Corporation, Wendy's also offers some products on a limited time only basis. ("Wendy's International (NYSE) - Business Description")

The Hortons restaurants provide customers with a menu that includes; donuts coffee, baked goods and cappuccino. Quality and uniformity throughout the restaurant units is important to the success of the firm throughout all restaurants. ("Wendy's International (NYSE) - Business Description") The corporation is able to assure this quality by publishing comprehensive specifications and training employees in customer service and food preparation. The corporation conducts field visits to the franchise owned stores to assure quality and uniformity and to make recommendations. ("Wendy's International (NYSE) - Business Description")

Financial Analysis

For the period ending September 29, 2002, total revenue was $722, 133,000 and gross profit was $205,488,000. Operating Expenses related to Selling General and administrative expenses were $63,568,000. Additional operating expenses were equal to $34,293,000. Earnings Before Interest and Taxes were $107,843,000. ("Wendy's International Quarterly Income Statement") Cash Flows from operating activities were $136,104,000, Cash Flows from Investing activities were -$62,430,000 and cash flows from financing activities were -$19,008,000. Change in Cash and cash equivalents was $54,666,000. ("Wendy's International Quarterly Cash Flow Statement") Total assets are $2,561,426,000.

The average earnings estimate for this quarter is.57. The low estimate is.55 and the high estimate is.58. The average revenue estimate for this quarter is $785M. The high estimate is $813M and the low estimate is $768M. (First Call Earnings Estimates - Wendy's International Inc.) The stock price as of April 29, 2003 was 28.99. The 52-week low was 23.97 and the 52-week high was 41.60.

Valuation Analysis

The VectorVest stock analysis of Wendy's as of 4/25/2003 is as follows:

Wendy's current value of $38.50 and is undervalued when compared to its stock price of $27.89.

The relative value is 1.35 and is very good on a scale of 0.0 to 2.0. The relative safety of the stock is also very good at 1.37. The relative timing rating is fair at 1.05 and the Comfort Index is excellent at 1.54. The company has a GRT of 11%, which is viewed as good. EPS is $2.12 and the P/E ratio is 13.16. The earnings yield is 7.61%. (VectorVest)

Wendy's pays a dividend of $.24 per share and the Dividend Yield is 0.9%. The dividend safety rating is excellent at 97 on a scale of 0 to 99. Wendy's dividend growth rate is 0% and the YSG- vector is fair at.98. The market capitalization for Wendy's is $3,207,000,000. (VectorVest)

McDonald's (MCD) vs. Wendy's (WEN) as of April 29, 2003

Gap Industry Analysis

The Gap became a corporation in 1969 and is a member of the apparel segment of the retail industry. The Gap operates as a global specialty retailer and sells personal care products, accessories and casual apparel. The company operates under three brand names: The Gap, Old Navy and Banana Republic. All of the aforementioned products of designed exclusively by the company and produced independently. Locations of the retail apparel store can be found all over the world in countries such as Germany, Canada, the United States, the United Kingdom, Japan and France. There are currently 4,171 company owned stores.

The Gap, Inc. (NYSE) - Business Description")

The corporation's stores sell high quality apparel at moderate prices. The products that the company sells are designed for teenagers and adults and include khakis, denim and t-shirts. The company also has apparel that is designed specifically for kids and babies; these lines of Gap clothing are called GapKids and BabyGap. GapKids was launched in 1986 and BabyGap was launched in 1989. GapKids and BabyGap also offer the high quality products and moderate price of the regular Gap Store. ("The Gap, Inc. (NYSE) - Business Description")

The Gap also has a line of apparel that sells men's and women's underwear and sleepwear called GapBody which was launched in 1998.

Currently the corporation operates 2,932 Gap brand concept stores at 1,858 locations inside Canada, the United States, the United Kingdom, Germany, France, and Japan. Gap concept stores only include The Gap, GapKids, BabyGap and GapBody. "Gap concept store," does not include the Old Navy or Banana Republic Brands. ("The Gap, Inc. (NYSE) - Business Description")

The Banana Republic brand was acquired by the Gap in 1983. Banana Republic offers dress-casual apparel, tailored apparel and accessories for women.

Banana Republic also sells high quality products but at slightly higher prices than The Gap brand stores. According to Multex Investor, "Banana Republic products range from apparel, including intimate apparel, to personal care products and home products. As of February 2, 2002, the Company operated 441 Banana Republic stores in the United States and Canada." ("The Gap, Inc. (NYSE) - Business Description")

The Old Navy Brand was launched by Gap in 1994 and aided the company in addressing the need for value-priced apparel. The products that are sold by the Old Navy brand include shoes, apparel, and accessories. The store sells products for men, women, children and infants. Currently there are 798 Old Navy stores operating in Canada and the United States ("The Gap, Inc. (NYSE) - Business Description")

All Gap concept stores, Old Navy and Banana Republic are open for business seven days a week and on most holidays. The company accepts personal checks, cash, debit card and credit cards. The stores also accept credit cards that are issued by other brands in the company. For instance, Old Navy will accept a credit card issued by The Gap. ("The Gap, Inc. (NYSE) - Business Description")

Financial Analysis

In the period ending November 2, 2002, total revenue for the Gap equaled $$3,644,956,000 and the company's Gross profit was $1,315,609,000. Selling General and Administrative Expenses equaled $1,009,393,000. Earnings Before interest and taxes was equivalent to $315,786,000. ("Gap, Inc. Quarterly Income Statement") Cash Flows from operating activities were $73,764,000, Cash Flows from investing activities were -$32,095,000 and cash flows from financing activities were $71,929,000. Change in Cash and Cash equivalents totaled $114,289,000. ("Gap, Inc. Quarterly Cash Flow Statement") Total Assets were $9,908,919,000

The average earnings estimate for The Gap is.11. The highest earnings estimate is.15 and the lowest is.9. The average revenue estimate is $3.2 billion. The highest estimate is $3.4 billion and the lowest estimate was $2.9. The stock price as of April 29, 2003 was $16.67 per share. The 52-week high was 17.14 and the 52-week low was 8.35. ("First Call Earnings Estimates - Gap Inc.")

Valuation Analysis

The VectorVest stock analysis of GAP as of 4/28/2003 is as follows:

The company's current value is $20.00 per share and the stock is undervalued because the current price of the stock is $16.42 per share. The relative value of the stock is excellent at 1.42 on a scale of 0.0 to 2.0. The relative safety of the stock is fair at 1.06 and the relative timing of the stock is excellent at 1.52. The Comfort index for this stock is fair at 1.10. Gap's GRT is considered excellent at 25%. The EPS is $0.76 and the P/E ratio is 21.61. The Earnings Yield is 4.60% (VectorVest)

Dividends are paid at a rate of $0.09 per share and the Dividend Yield is 0.05%. The Dividend Safety rating is good at 74. The dividend growth rate is 0% and the company has an YSG-vector of.75. The market capitalization for the company is $14,565,000,000. (VectorVest)

American Eagle Outfitters

American Eagle Outfitters is a corporation specializing in accessories casual apparel and footwear for men and women. The company's target market is composed of individuals ages 16-34.

American Eagles competitors in the U.S. include: the Gap, Abercrombie & Fitch, and the Limited. In addition, the Company competes with the casual apparel and footwear departments of department stores. ("American Eagle Outfitters (NASD)") According to Multex investor,

The Company designs, markets and sells its own brand of relaxed, clean and versatile clothing, providing high quality merchandise at affordable prices. Its lifestyle collection offers casual basics like khakis, cargos and jeans; fashion tops like rugbys, polos and graphic T's; and functional items like swimwear, outerwear, footwear and accessories under its American Eagle Outfitters and AE brand names." ("American Eagle Outfitters (NASD)"