McDonald's does battle with critics, competition

Q. My shares of McDonald’s Corp. haven’t done much lately and now there’s worry about the economy. Should I hold on?

A. The world’s largest restaurant company is enjoying an increase in same-store sales thanks to new products such as the Asian chicken salad and premium coffee.

Longer restaurant hours, a thriving breakfast business and non-cash payment options also have provided a boost. This famous brand has a 30-year history of paying cash dividends and increasing the dividend each year.

It has more than 30,000 restaurants in 118 countries, 8,000 of which it operates directly. In January, it successfully took its Chipotle Mexican Grill public and intends to divest itself of its entire stake by year-end.

What’s holding its stock back is concern about the consumer economy and gas prices, intense competition in the fast-food industry and fallout from critics who contend the firm contributes to obesity.

Shares of McDonald’s (MCD) are down 2 percent this year following gains of 5 percent last year, 29 percent in 2004 and 54 percent in 2003. Despite improved sales, first-quarter net income dropped 14 percent, reflecting a large tax gain a year ago.

Consensus analyst opinion on McDonald’s is „buy,“ according to Thomson Financial, consisting of nine „strong buys,“ eight „buys“ and four „holds.“

McDonald’s has been promoting its healthier menu items such as large salads and apple slices, in part to respond to „Chew On This: Everything You Don’t Want to Know About Fast Food,“ a children’s book co-written by „Fast Food Nation“ author Eric Schlosser, and the film version of „Fast Food Nation.“ These challenge fast food on issues such as obesity and low-wage employment.

Meanwhile, an exclusive 10-year-old cross-promotion agreement with Walt Disney Co. is expiring. In May, McDonald’s begins tie-ins with DreamWorks Animation and others.

Internationally, McDonald’s has 760 restaurants in China and expects to reach 1,000 by the 2008 Olympics in Beijing. It opened its first drive-through restaurant in China in December and plans for more than half its expansion to be drive-throughs. It is developing many of them with China Petroleum & Chemical Corp., known as Sinopec, an oil giant with 30,000 service stations.

The company hopes to reverse downturns in Japan, where it will create a new food business to make better use of stores with low sales, and in the United Kingdom, where it is aggressively promoting discount menu items.

Expected earnings growth rate is 8 percent this year, compared to 36 percent predicted for the restaurant industry. Next year’s predicted increase is 8 percent versus 19 percent forecast industrywide. The five-year annualized growth rate is projected at 8 percent, compared to 13 percent expected for its peers.

Source: chicagotribune.com