Inside Wall Street
WHY McDONALD'S IS SIZZLING THIS SUMMER
On Wall Street, very few growth stocks ever come back quite as zesty and exuberant as they once were. But one that's now being pursued by some big investors as a tantalizing "reborn" growth stock is McDonald's. The operator of the world's largest chain of fast-food restaurants has more than 8,700 units in the U.S. and more than 3,600 overseas.
Although McDonald's hamburgers put the company on the fast-growth lane in earlier years, its shares started to lag behind the market in 1990 and 1991, when earnings failed to meet the Street's ever-rising expectations. The institutions started to look elsewhere for a growth play. But this year, something happened: McDonald's hit 47 a share, a new high. Why this change of appetite for McDonald's?
"I think McDonald's is in the process of regaining its lost glory in the stock market," says Stuart Shikiar, managing director at Prudential Securities Investment Management, which steers some $2 billion. He thinks the stock will move to much higher ground, "most likely in the 60s," over the next 12 months. Says Shikiar: "McDonald's is the new great multinational play."
BURRITOS TO GO. Like many other investors, Shikiar had previously thought the company had "lost control of its program for strong earnings growth." The "big rap" against McDonald's, he explains, was that while its international sales, which accounted for about 40% of operating profits, were going gangbusters, the domestic front wasn't showing much growth. "That's now changing as the company has revised its overall menu for domestic growth," says Shikiar. One example: McDonald's has launched a "value strategy" that discounts the price of certain meals. This strategy is aimed at building up traffic--and it's working, says Shikiar. The chain has also introduced "Dinner at McDonald's," which basically is a menu that's more diverse and higher priced. Also, offerings now include low-calorie hamburgers, chicken fajitas, and burritos.
An analysis by Standard & Poor's notes that the value program already had an impact on this year's first quarter, when McDonald's posted its largest U.S. quarterly sales gain in more than two years.
Shikiar says efforts to boost domestic sales will help earnings jump next year to $3.15 a share, from this year's estimated $2.75, and last year's $2.35. As investors start recognizing the company's renewed potential for fast growth, he says, they will start rushing for McDonald's stock again.GENE G. MARCIAL