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Stay on top of the market with Prudential Securities and Dow Jones. Click on the url below to learn how you can receive a 1-year subscription to The Wall Street Journal or BARRON'S, FREE! http://www.money.com/prudentialsecurities ***************************************************************** SIVY ON STOCKS from money.com December 13, 2000 How now, Mad Cow A slowing economy, unfavorable exchange rates and new fears about Mad Cow disease are all taking a toll on McDonald's. What better reason for a contrarian to buy. By Michael Sivy For a decade, McDonald's stock set a record high every single year. Then in 1999, the stock peaked just short of $50 a share -- and it's been downhill ever since. McDonald's hit a low of less than $27 in September, and the share price has recovered by only $4 since then. The global hamburger chain still appears to face a spate of problems, but many contrarian-minded analysts see a great buying opportunity. With 28,000 outlets in 120 countries, McDonald's gets about half its sales and operating profits outside of North America. Overall earnings were able to expand at an 11.5 percent compound annual rate through most of the 1990s because double-digit growth internationally gave a huge boost to single-digit gains in the United States. But the global growth engine began to falter with the Asian financial crisis in 1998. Since then, overseas results have been penalized by unfavorable exchange rates, particularly the weak euro, which erodes the value of profits earned in much of Europe. This year, for instance, foreign exchange losses could clip nearly 5 percent from McDonald's net income. Recently, however, an even bigger problem has emerged in Europe: the resurgence of Mad Cow disease. Various forms of brain disease have long occurred spontaneously in both animals and humans. But adding the remnants of slaughtered animals to cattle feed -- a practice that used to be widespread in the U.K. -- appears to have spread some form of the disease more widely in that country. Recently, however, infected cows have also been identified on the Continent, leading to fears about the safety of European beef. Analysts believe that could lead to a temporary drop in the consumption of McDonald's hamburgers. Indeed, the company's European sales were off 11 percent in November. It's scary, but it's also hard to believe that there will be any significant damage to McDonald's long-term results. The use of animal remains in feed is heavily restricted today, and there is little evidence that the practices that promoted Mad Cow were ever significant outside of the U.K. Moreover, because of quality concerns, McDonald's has always been highly selective about its suppliers. So the beef it buys is likely to conform to the highest local safety standards. And to the extent that sales of beef are hurt in continental Europe, McDonald's can promote alternative products, as it already does in countries where local customs discourage beef consumption. Once the Mad Cow scare dies down, currency exchange trends should also help the stock. After declining in value for nearly two years, the euro could rebound by 10 percent or more over the next 12 months, according to forecasters. McDonald's will open some 1,800 new outlets this year -- 200 in the U.S. and the rest in foreign markets. And store growth in 2001 is projected to be roughly the same. Over the next five years, earnings per share could rise nearly 12 percent annually. The stock, which is both a growth favorite and a popular defensive choice (suitable now that tech is in trouble), has traded at P/Es in the mid-20s over the past few years. At a current $31, though, shares go for less than 20 times next year's estimated earnings of at least $1.60 a share. Based on expected earnings growth and a modest P/E increase as recent bad news abates, analysts see the stock reaching $42 or more before the end of 2001. ============================= NEW ON MONEY.COM: STOCKS Michael Sivy's Forecast 2001 A muddled election, a slowing economy and shaky profits make 2001 a year for building cash and bargain hunting. http://www.money.com/depts/investing/forecast01/ STOCKS The best investments for 2001 Not to get too technical, but most stocks sucked in 2000. Yet opportunity abounds in 2001 -- if you know where to look. http://www.money.com/depts/investing/bestinvest01/ STOCKS The art of managing stock options Sure, they're complicated. follow our simple rules and they won't be. http://www.money.com/depts/investing/options/ PLANNING Now for the real application Chances are, you'll need to borrow for college. Here's how to come out on top. http://www.money.com/depts/investing/college/ ============================= ### 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/ Earning Releases and Calls For the latest corporate earnings releases and online conference calls click on: http://money.ccbn.com * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! Sign up for a RISK-FREE issue of MONEY MAGAZINE at http://www.money.com/subscribe2 Or if you prefer call our toll-free number 1-800-544-4594 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * We may, from time to time, contact you with offers for Time Inc. products and services which we think may be of interest to you. If you would prefer us not to contact you in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletters, please let us know by sending us an e-mail at <no_solicit@money.com<. Additionally, from time to time we may provide your e-mail address to carefully chosen companies whose offers we think may be of interest to you. If you would prefer us not use your e-mail address in this manner, AND YOU DID NOT INDICATE THIS PREFERENCE AT THE TIME YOU SIGNED UP for the Sivy on Stocks online newsletter or any other Time Inc. online newsletter, please let us know by e-mailing us at <no_transfer@money.com<.
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