McDonalds

We believe MCD offers little upside following price appreciation of roughly 35% YTD and is fairly valued at current levels. MCD offers exceptional international growth opportunities, a dividend yield of 2.50%, increasing dividend payout and repurchase shares, but the upside potential is reflected in the $59.75 stock price (as of close on 10/31/07). Based on our conservative DCF analysis, we believe that MCD is worth $65.30 a share on a DCF analysis and is worth $55.85 a share using a blended comp multiple of both P/E and P/S.

The market's perception of MCD as a relatively safe, large-cap, international play will continue to support the shares in the near-term and is our primary rationale for not aggressively selling the stock. Because we do have a positive bias on McDonald's as a company, but believe valuations are stretched at current levels, we would revisit the stock if we saw a pull-back from current levels.

Reasons to believe MCD is fairly valued at current levels (detailed on page 5)

Ð'* The cash payout growth will slow

Ð'* International expansion in APMEA and other growth regions will take time

Ð'* Same store sales and operational efficiencies in the mature markets have played out

Ð'* Currency tail-wind is not a sustainable top line driver

Ð'* DCF and P/E valuation - The current price accurately reflects our DCF and multiple valuation

Where we could be wrong (detailed on page 7)

Ð'* Continued execution from management

Ð'* International expansion grows faster that expectations

Ð'* Increased fund flows because of the large-cap, international and counter-cyclical aspects

Ð'* MCD finds more ways to distribute cash to shareholders

Thesis

MCD has been the icon of the fast-food business in the United States over the past 50 years. They have revolutionized the quick service industry and been a market leader in growth, innovation and efficiency. Over the past five years MCD has focused on improving operating efficiency, reinvigorating US growth and aggressively pursuing international store growth. These initiatives have been handsomely rewarded by the street and we believe that the current share price reflects these initiatives. Because MCD stock has appreciated greatly over the past few years, we believe the risk/reward is not favorable at current prices, would sell at current levels and look for a more attractive entry point to invest new money.

Company Background

Over the past few years, McDonald's has aggressively implemented a strategic initiative called "Plan to Win." The Plan to Win strategy emphasized the core fundamentals that made them the global leader in the restaurant: industry, quality, service, cleanliness and value. By focusing on these "value drivers" over the past five years, McDonald's has dramatically improved most business segments. In addition, they have returned cash to shareholders, increased same-store sales, improved operating margins and focused on international growth.

Industry Background

McDonald's is the market leader in the United States restaurant industry, accounting for 2.5% of the 550,000 total restaurants. As the market leader, McDonald's faces intense competition around every corner. MCD faces pressure not only from other quick service restaurants, but also from nontraditional competitors as MCD expands offerings to include healthier food and more variety .

Top-Down Approach

While we have not seen conclusive evidence that the US economy is destine for a pullback, the future for the US consumer weighs heavily on our mind. We believe it is just a matter of time until an overburdened consumer [due to(1) higher gas prices, (2) credit problems, (3) slowing job growth, (4) and expected weakness heading into the holiday season] has an adverse affect on GDP.

Because of our bias towards a slowing US economy in the near-future, we would prefer to overweight consumer staples vs. consumer discretionary companies. We also prefer large cap, multinational companies with significant international exposure to more volatile small cap names.

From our top-down approach, MCD is in the sweet spot and could continue to see increased fund flows for this reason. MCD is protected from a slowing US economy with 65% of revenue coming from overseas and is positioned in the QSR space as a "staple" dining product rather than casual dining. Because of these economic reasons, MCD shares, relative to other consumer companies could continue to out-perform.

Revenue Split (based on revenue percentages as of 3Q07)

*APMEA includes Asia, Middle-East and Africa

As you can see from Tables 1 (below), MCD is truly a global company with 65% of revenue coming from overseas. The United States (~35% of revenues) is a slow growth story in our opinion, with 1-2% store growth potential and 3-5% revenue growth potential going forward. The exciting revenue potential for MCD going forward is the growth that they could see coming from the APMEA regions. APMEA (Asia, Middle-East and Africa) has huge revenue potential over the next several decades, and it is the growth coming from these parts of the world that will ultimately drive MCD shares over time. The APMEA region alone has the potential to account for Ð'Ð... of the company store growth and grow top-line at mid to low double digits.

Table 1

In table 2 (below), you can see that McDonalds is continuing to growth its store base with two distinct strategies, both company-owned stores (~73% of MCD revenue) and franchised stores (~27% of MCD revenue). While both growth avenues offer more revenue, EPS, and cash potential for MCD, each strategy has much different effect on the operating margins.

Table 2

Why we would sell MCD

1) The cash payout