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Exclusive: Salomon Sees McDonald's Earnings Boost from Emerging Markets

By Louise Kramer
Staff Reporter



Salomon Brothers

is slated to release a report Wednesday morning that says emerging overseas markets could provide an overlooked boost to the burger giant's earnings going forward.

Salomon analyst Paul Westra says the restaurants in McDonald's vast empire of 94 emerging markets -- emerging for McD's that is, and not necessarily Third World countries -- will provide additional earnings over the next decade as they mature. Westra initiated coverage of McD's with a strong buy rating in 1995, when the stock was at 30, and said he has no plans to change his rating. The shares, which have been enjoying a rally, were unchanged Tuesday, closing at 54 1/2.

Westra says these emerging markets, including such countries as Italy, Greece, Denmark, Belgium, Spain, Switzerland, China and Hungary, should follow similar growth patterns enjoyed by the now mature -- and recently lackluster -- foreign markets McDonald's first started growing in the early '80s. Those markets include Canada, Germany, France, the U.K., Australia, Japan and Brazil.

The emerging-markets restaurants now deliver profits of about $100,000 per unit, Westra says. The mature markets, whose same-store sales have been negative of late, have beefier profits of about $210,000 per unit.

At the end of 1996, McDonald's had 8,928 outlets on foreign soil and 12,094 outlets in the U.S. More than 70% of the company's 2,400 to 2,800 new units on the boards for this year are targeted for foreign markets, the company says. About 1,000 of those units are slated for emerging markets, Westra says.

The emerging markets already contribute 35 cents per share to annual earnings, says Westra, whose firm has done no recent underwriting for McDonald's. His estimate for McDonald's for the year is $2.53 per share, 5 cents above

First Call

estimates of $2.48.

If the profit from emerging-markets units doubles over the next decade, as expected, "there's a penny per quarter

in earnings that's not in consensus estimates," Westra says.

Westra was on the money when McDonald's released its first-quarter earnings report April 17 at a penny below First Call estimates. He correctly figured earnings would be 49 cents per share.

While he continues to be hot on the Golden Arches, other analysts have thrown some salt on the fire. Allan Hickok of

Piper Jaffray

changed his recommendation from market performer to neutral April 21, and Jeffrey Omohundro of

Wheat First Butcher Singer

downgraded from outperform to hold on April 14.

"International isn't new," Westra says. "The next level is the emerging-market story. Our bullishness is largely focused on the enormous amount of leverage we expect to see out of their noncore markets."