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011220 McDonald's Expected to Announce Cautious Outlook

December 12, 2001

Chicago - Fast-food giant McDonald's Corp. is expected to serve up a cautious outlook, when investors look for signs of recovery in the company's European market to help offset increased U.S. competition and softness in “mad cow”-spooked Japan continue to pressure earnings.

“I think going into next year it's still going to be tough for them,” said Salomon Smith Barney analyst Mark Kalinowski. “It's likely that Japan will continue to suffer from negative comps (same-store sales). It doesn't seem like the international business as a whole is seeing its profits grow. And the U.S. next year looks very competitive.”

Analysts are looking for signs of a turnaround in Europe when McDonald's provides its fourth-quarter preview on Friday. The region, which last year accounted for more than a third of McDonald's yearly operating income of $3.3 billion, will be critical to next year's outlook for the company.

Mad cow disease, a fatal brain-wasting disorder found in cattle in Continental Europe late last year, was the catalyst that began four consecutive quarterly earnings declines for the Oak Brook, Illinois- based hamburger maker. Weak foreign currencies against a strong U.S. dollar have also taken a toll on profits.

Scientists suspect that eating meat from an infected cow can cause the human version of mad cow, known as variant Creutzfeldt-Jakob disease. More than 100 people in Europe have died from the disease.

McDonald's hamburger sales plummeted after consumers shied away from beef products, even though no McDonald's hamburger meat was linked to the disease.

“If Europe starts to recover, year over year, that's a pretty big chunk of earnings to show increases through 2002,” said Bear Stearns analyst Joe Buckley. November sales comparisons in the region should have become easier, he said, as November 2000 was the first month affected by mad cow outbreaks.

The discovery of mad cow in Japan, where three cows have tested positive since September, had led to similar consumer concerns there. Japan, where McDonald's operates under a joint venture that recently went public, remains critical to the company's success in the Asia- Pacific region.

In the United States, McDonald's is restructuring its divisions to provide more support from headquarters. Increased competition from rivals such as Burger King Corp. and the improving Hardee's chain has led to aggressive promotions from McDonald's that could slice into its operating margins, analysts said.

They point specifically to a new value program in McDonald's highly competitive Southern California market, where the company is said to be offering 99-cent Big Macs and other sandwiches in an effort to drive up traffic. McDonald's was not immediately available to comment on the promotion.

“I think the U.S. is soft, and I don't think they would be aggressively discounting anywhere unless that was the case,” said Deutsche Banc Alex. Brown analyst John Glass.


In October, McDonald's said that if currency levels remain steady, it expects 2002 per-share earnings to grow 5 percent to 10 percent before a charge in this year's fourth quarter. Analysts on average expect the company to earn $1.36 a share this year, according to Thomson Financial/First Call.

Since the company's announcement, analysts have lowered their 2002 consensus forecast to $1.49 a share from an earlier $1.54.

McDonald's could warn marginally on the fourth quarter on Friday, coming down a penny or two below the consensus estimate of 35 cents, but it is unlikely the outlook for next year will change much, analysts said.

A marginal warning would have little bearing on the stock, a component of the Dow Jones industrial average. McDonald's stock has lost about 25 percent of its value since November 2000, when it was trading above $34 a share. The shares were off 85 cents or 3.3 percent at $25.63 late Wednesday afternoon on the New York Stock Exchange.

On Tuesday, Lehman Bros. analyst Mitchell Speiser cut his rating on the shares to “market perform” from “strong buy,” prompting a selloff.

“This stock is so unloved, it seems hard to think of anything to shake people up more than they already have been,” Glass said. “I do believe there's little downside.”


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