• McDonald’s Corp (NYSE:MCD) is off 12% from the end of last year, but prospects for the company are excellent.
• Despite losing $50 million a month in Russia, McDonald’s should still produce significant positive free cash flow in 2022.
• Investors should still load up on MCD stock, given that its valuation has room to grow at a 1% FCF yield over the next 2 years.

McDonald’s stock has fallen 12% from its peak early this year at $269.69 on Jan. 6. Moreover, as of March 18, MCD stock was at $236.25, down 11.5% year-to-date (YTD).

Last year the company produced excellent earnings and powerful free cash flow. But investors now are more concerned about the company’s Russia exposure. Let’s look further into that and how it will affect the company’s valuation.

Where Things Stand With McDonald’s Corp

As a result of the Russian invasion into Ukraine, McDonald’s temporarily shut down all 850 of its stores in Russia on March 8. It will continue to pay the salaries of its Russian employees (62,000 people).

Barron’s reported on March 9 that the company’s CFO said it will cost the company $50 million per month or 5 to 6 cents per share.

I have looked at this and believe that the company’s free cash flow (FCF) can handle it. Here are some numbers supporting this reasoning.

Last quarter, McDonald’s produced about $2.666 billion in operating cash flow and, after deducting $687 million in capex spending, its FCF was $1.979 billion. That worked out to about 32.9% of sales.

Analysts forecast revenue to grow about 5.3% to 24.45 billion from $23.222 billion last year. So even if we deduct about $1.8 billion in sales from that number from Russia (i.e., $600 million in FCF/33% margin = $1.8 billion), sales will still be $22.65 billion. That implies lower sales for the year, but I suspect it will be closer to flat.

So even if we assume a 33% margin on the $22.65 billion in sales, the FCF will stay roughly flat at $7.5 billion. Note that $600 million in cash flow lost from Russia is basically less than 10% of the remaining $7.5 billion in FCF.

This also still leaves plenty of room for McDonald’s to pay its dividend which costs about $4.1 billion. It could also allow management to raise the dividend per share as well as buy back shares.

In other words, the Russia cash burn of $600 million annually will not put any major dent in McDonald’s FCF.

Analysts Are Mixed On the Move

Not all analysts are down with the move. Northcoast Research analyst Jim Sanderson cut his rating on MCD stock to Neutral from Buy, according to Barron’s. The magazine reported that his view was that this will cause headwinds to earnings that could last for years.

However, the average analyst price target is still significantly higher than today’s stock price. The average target of 26 analysts who’ve written on the stock in the last three months is $286.50, according to TipRanks.com. That represents a potential upside of 20% for MCD stock.

If we assume that the market gives the stock a 4% FCF yield and the company produces $7.5 billion in FCF this year, that implies a market capitalization of $187.5 billion. This is still 8.4% over today’s market cap of $176 billion. That implies a minimum price target of $257.42.

In other words, even if its FCF stays flat this year (i.e., after cutting out the growth in the company from $600 million in FCF lost from Russia), MCD stock still has upside.

What Investors Should Do

Despite the horrors of war, the likelihood is that this situation will not last more than a year or so. Even if it does, the company seems confident that it can work around the issue. By continuing to pay its employees the company is probably able to avoid getting its assets nationalized by the Russian government as well.

Therefore, I suspect that this is a unique opportunity to buy more MCD shares on the cheap for value-oriented investors. In addition, McDonald’s will likely continue both its share buyback program and the likely increase in its dividend after the next two payments. These will also act as catalysts to help the stock push higher, despite the issues relating to Russia.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.