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) - Get Report. 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.
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.
Also, did you know that during the past year the company has bought, built out or developed concepts such as Aroma Cafe, Boston Market, Chipotle Mexican Grill and Donatos Pizza?
McDonald's expansion into food concepts from pizza to Mexican is important because it enables the company to not only increase its worldwide store footprint but to diversify its business beyond burgers and to pick up market share from competitors such as
which owns KFC, Taco Bell and Pizza Hut. And even more importantly, the new lines give McDonald's a growth engine that will kick in as its core brand matures.
The bottom line is that McDonald's, with roughly $40 billion in sales and more than 45 years of history, is simply a big name that's down on its luck. Although the next couple of quarters could be tough, I'm confident management's efforts to trim costs and expand beyond its core burger business will have a favorable impact on the stock heading into the new year.
In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to