Sivy on Stocks: How now, Mad Cow ,
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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.

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