McDonald's Still Has the Beef

This article was originally published on Oct. 23, 2001.

A slowing economy, decreased consumer spending and mad cow disease have no doubt taken their toll on fast-food giant McDonald's (MCD Quote). Let's face it: Four quarters of declining earnings is not an anomaly. But does this mean you should dump the stock and move on to greener pastures? Not at all.

Remember, McDonald's still has a few things going for it. With more than 29,000 locations, a solid franchising business and extremely deep pockets, the company isn't going away. And although critics seem intent on reporting the negatives, things really aren't that bad.

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In fact, management has spent a great deal of effort battening down the hatches and trimming expenses. The company has closed stores that underperformed, reduced payroll, reorganized management structure, improved its supply-chain management process and tweaked its advertising. The net result could trim more than $100 million on an annualized basis beginning as early as next year.

Hadn't heard that? Read on.

The company has also been buying back stock pretty aggressively. In the third quarter, McDonald's spent about $914 million to repurchase 30.2 million shares in the open market.

Ask yourself: Would the McDonald's board authorize this repurchase if it didn't believe the stock was severely undervalued? No way.

This money could have easily been plunged back into the business or distributed as a dividend. So the fact that the company is willing to make a wager on the stock is a terrific sign that management believes there are better times ahead. ...