Food fears bite McDonald's

Officials of McDonald's Corp. probably wish they had never heard of mad cow disease or foot-and-mouth disease, but they have — and they know McDonald's earnings and stock price are suffering as a result.

The Globe and Mail
March 20, 2001

Food fears bite McDonald's
European concern over livestock diseases is hurting restaurant leviathan's shares
Angela Barnes

Officials of McDonald's Corp. probably wish they had never heard of mad cow disease or foot-and-mouth disease, but they have — and they know McDonald's earnings and stock price are suffering as a result.

Last week, the fast-food giant reduced its forecast for first-quarter earnings by 4 cents (U.S.) or 5 cents to 29 cents or 30 cents, in large measure because of soft European demand.

And that in turn reflects consumer concern arising out of the beef scare in Europe.

McDonald's earned 33 cents a share in the first quarter of 2000.

The announcement wasn't a complete surprise as the outbreaks, which have followed one after another, have been making headlines. Nevertheless, investors knocked the stock of the Oak Brook, Ill.-based concern — which operates the Boston Market, Aroma CafĂ©, Chipotle Mexican Grill and Donatos Pizza restaurants in addition to the McDonald's chain — down last Friday to an intraday 52-week low of $26.11.

The shares closed yesterday on the New York Stock Exchange at $26.38.

The slide occurred even though the company said it expects to return to double-digit share-profit growth in the last three quarters of this year.

But Janice Meyer, an analyst with Credit Suisse First Boston Corp., and her associates aren't as confident as McDonald's management. "We suspect their confidence stems from easy comparisons in the second quarter, and then the odds that BSE and economic issues clear up in the second half," she wrote. "Though this rationale sounds okay, it is far from assured."

BSE stands for bovine spongiform encephalopathy, better known as mad cow disease.

She also lowered her estimate for McDonald's for the full year to $1.53 a share from $1.61, which would mean a gain of just 4.8 per cent over the previous year. And she said in a report last week that earnings visibility remains poor.

Andrew Barish, an analyst with Banc of America Securities, also has reservations about McDonald's growth projections.

His estimate of the company's profit this year is even lower than that of Credit Suisse at $1.50.

McDonald's operates more than 28,000 restaurants around the world, with European operations accounting for about 40 per cent of its operating profit.

U.S. sales, in contrast to those in Europe, have been reasonably robust so far this year, even in the face of discounting by competitors including Burger King. But in the United States, the company faces some labour and energy-cost pressures.

In addition to taking steps to improve the European picture, McDonald's has also undertaken a review of its cost structure. It has also been testing new ideas for its U.S. restaurants, including the "McDonald's with the Diner Inside" concept that it is unveiling in Kokomo, Ind.

The diner will offer 122 food items, in addition to the usual McDonald's products.

Given the question marks in McDonald's outlook, analysts hold varying views on the stock.

Ms. Meyer has the stock as a "hold" while Mr. Barish has a similarly less-than-enthusiastic "market performer" on it.

She says she sees this year as one of transition for McDonald's and so "aggressive purchase of the shares is unwarranted."

However, at the same time, she sees signs of change. Instead of delivering a consistently upbeat message, management is looking at initiatives to improve the bottom line, she noted.

Moreover, earnings projections have come down to what she sees as close to realistic levels.

Those factors, together with the recent relatively strong stock performance in an otherwise weak market, "lead us to believe we are close to the bottom," she said.

Mr. Barish of Banc of America Securities also sees a number of pluses in the McDonald's picture, not the least of which are its strong brand franchise, its longer-term business prospects, international expansion and strong free cash flow. The latter should enable the company to continue its stock repurchase plan, he expects.

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