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SIVY ON STOCKS from money.com
May 14, 2001 *****************[ A D V E R T I S E M E N T ]**************** Jump-start a child's College Fund with MONEY's $5000 QUICK CASH Sweepstakes! It's easy - just click the link below for your chance to enter to win $5000 Cash! Plus while you're at money.com, jumpstart your investments with a FREE Trial issue of MONEY! Click Here: http://www.money.com/scholarship ************************************************************** Supersize this stock! For six months, McDonald's has been battered by nonstop bad news. Now the outlook is improving and the stock appears poised for a strong rebound. By Michael Sivy Since last fall, McDonald's has been hit with one problem after another. The weak U.S. economy has been bad enough. But since half the company's sales and operating profits come from overseas, McDonald's has been severely hurt by the weak euro and the renewed scares about mad-cow disease and hoof-and-mouth disease, which have reduced European beef consumption. Finally, though, the outlook appears to be improving. Earnings trends may remain unfavorable through the summer, but by the fourth quarter, business should be back on track. That should mean a big payoff for contrarians who scoop up McDonald's [MCD] today at prices just a few dollars above the stock's 52-week low. I last recommended the stock in December at $31 a share. At that price, 35 percent below the record high set in 1999, McDonald's looked like a great value play, and the stock rallied 12 percent going into January. But it began slipping back as soon as it became evident that business would not immediately turn around. In fact, earnings per share fell 12 percent in the first quarter. Basically, McDonald's has been beset by a string of problems that have been compounded by poor management choices. The first is the economic slowdown in the U.S., which has depressed growth in same-store sales. In addition, the company has relied too much on promotions and other marketing gimmicks, which haven't been working well in the tougher economy. More serious, however, has been the falloff in profits from foreign sales, particularly in Europe. To compensate for the decline in beef consumption and the chronically weak euro, which has reduced the dollar-value of profits earned in Europe, McDonald's has been increasing the pace of new-store openings. But that has only undercut existing stores, and profitability has suffered. Fortunately, those problems are all transient. As the U.S. economy picks up again, domestic results should improve -- particularly if McDonald's is successful with innovations such as cafes that offer Italian-style coffee at prices cheaper than Starbucks charges. International results should improve as the company diversifies its menu to offer a wider range of non-beef items. But the key to better European results is a revival in beef consumption, and a rebound in the euro, which is likely after coins and bills actually start circulating in January. And already, there is evidence that the beef scare has peaked and that consumers are starting to order more burgers. There's no question that McDonald's stock is cheap. The shares trade at 17 times earnings, compared with multiples that have been regularly in the mid-20s since 1996. True, the rebound has taken longer than I expected. But I think that we'll see earnings growth pick up toward year-end, and then continue at a 12 percent-plus compound rate over the next five years. In addition, the P/E should rise once it's clear that prospects are improving. That combination should make McDonald's an above-average holding for patient conservative investors. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/sitelets/datastore/index.html?mn01 ----------------------------------------------------------- * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! 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